Zhejiang Wanliyang (SZSE:002434) May Have Issues Allocating Its Capital

What financial metrics can indicate to us that a company is maturing or even in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. So after we looked into Zhejiang Wanliyang (SZSE:002434), the trends above didn't look too great.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Zhejiang Wanliyang, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.038 = CN¥261m ÷ (CN¥11b - CN¥3.9b) (Based on the trailing twelve months to June 2024).

Therefore, Zhejiang Wanliyang has an ROCE of 3.8%. Ultimately, that's a low return and it under-performs the Machinery industry average of 5.5%.

Check out our latest analysis for Zhejiang Wanliyang

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zhejiang Wanliyang's ROCE against it's prior returns. If you're interested in investigating Zhejiang Wanliyang's past further, check out this free graph covering Zhejiang Wanliyang's past earnings, revenue and cash flow.

What Does the ROCE Trend For Zhejiang Wanliyang Tell Us?

There is reason to be cautious about Zhejiang Wanliyang, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 8.2% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Zhejiang Wanliyang to turn into a multi-bagger.

In Conclusion...

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Long term shareholders who've owned the stock over the last five years have experienced a 21% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with Zhejiang Wanliyang (including 2 which can't be ignored) .

While Zhejiang Wanliyang may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.