The Returns On Capital At Zhejiang RIFA Precision Machinery (SZSE:002520) Don't Inspire Confidence

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. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. On that note, looking into Zhejiang RIFA Precision Machinery (SZSE:002520), we weren't too upbeat about how things were going.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Zhejiang RIFA Precision Machinery is:

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

0.0011 = CN¥1.4m ÷ (CN¥3.9b - CN¥2.6b) (Based on the trailing twelve months to September 2024).

Therefore, Zhejiang RIFA Precision Machinery has an ROCE of 0.1%. Ultimately, that's a low return and it under-performs the Machinery industry average of 5.3%.

Check out our latest analysis for Zhejiang RIFA Precision Machinery

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

What Can We Tell From Zhejiang RIFA Precision Machinery's ROCE Trend?

The trend of ROCE at Zhejiang RIFA Precision Machinery is showing some signs of weakness. Unfortunately, returns have declined substantially over the last five years to the 0.1% we see today. What's equally concerning is that the amount of capital deployed in the business has shrunk by 70% over that same period. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. If these underlying trends continue, we wouldn't be too optimistic going forward.

On a side note, Zhejiang RIFA Precision Machinery's current liabilities have increased over the last five years to 67% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

The Key Takeaway

To see Zhejiang RIFA Precision Machinery reducing the capital employed in the business in tandem with diminishing returns, is concerning. In spite of that, the stock has delivered a 15% return to shareholders who held over 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.

If you want to continue researching Zhejiang RIFA Precision Machinery, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Zhejiang RIFA Precision Machinery 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.