Zhejiang RIFA Precision Machinery's (SZSE:002520) Returns On Capital Tell Us There Is Reason To Feel Uneasy

What underlying fundamental trends can indicate that a company might be in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after glancing at the trends within Zhejiang RIFA Precision Machinery (SZSE:002520), we weren't too hopeful.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Zhejiang RIFA Precision Machinery:

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

0.0018 = CN¥2.5m ÷ (CN¥4.1b - CN¥2.7b) (Based on the trailing twelve months to March 2024).

Therefore, Zhejiang RIFA Precision Machinery has an ROCE of 0.2%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.8%.

See 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.

The Trend Of ROCE

We aren't too thrilled by the trend because ROCE has declined 97% over the last five years and despite the capital raising conducted before the latest reports, the business has -67% less capital employed.

On a side note, Zhejiang RIFA Precision Machinery's current liabilities have increased over the last five years to 66% 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 Bottom Line

In summary, it's unfortunate that Zhejiang RIFA Precision Machinery is shrinking its capital base and also generating lower returns. It should come as no surprise then that the stock has fallen 40% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Zhejiang RIFA Precision Machinery does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.