Zhongyeda Electric (SZSE:002441) Will Be Looking To Turn Around Its Returns

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after we looked into Zhongyeda Electric (SZSE:002441), the trends above didn't look too great.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Zhongyeda Electric is:

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

0.042 = CN¥194m ÷ (CN¥6.8b - CN¥2.1b) (Based on the trailing twelve months to June 2024).

Therefore, Zhongyeda Electric has an ROCE of 4.2%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 5.7%.

Check out our latest analysis for Zhongyeda Electric

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zhongyeda Electric's ROCE against it's prior returns. If you'd like to look at how Zhongyeda Electric has performed in the past in other metrics, you can view this free graph of Zhongyeda Electric's past earnings, revenue and cash flow.

How Are Returns Trending?

There is reason to be cautious about Zhongyeda Electric, given the returns are trending downwards. About five years ago, returns on capital were 7.8%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Zhongyeda Electric to turn into a multi-bagger.

The Bottom Line On Zhongyeda Electric's ROCE

In summary, it's unfortunate that Zhongyeda Electric is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 21% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

One more thing, we've spotted 2 warning signs facing Zhongyeda Electric that you might find interesting.

While Zhongyeda Electric isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.