Investors Could Be Concerned With Shandong Mining Machinery Group's (SZSE:002526) Returns On Capital

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. So after glancing at the trends within Shandong Mining Machinery Group (SZSE:002526), we weren't too hopeful.

What Is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Shandong Mining Machinery Group is:

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

0.019 = CN¥60m ÷ (CN¥4.9b - CN¥1.7b) (Based on the trailing twelve months to September 2024).

So, Shandong Mining Machinery Group has an ROCE of 1.9%. Ultimately, that's a low return and it under-performs the Machinery industry average of 5.2%.

See our latest analysis for Shandong Mining Machinery Group

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

What The Trend Of ROCE Can Tell Us

We are a bit worried about the trend of returns on capital at Shandong Mining Machinery Group. Unfortunately the returns on capital have diminished from the 9.9% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Shandong Mining Machinery Group to turn into a multi-bagger.

On a side note, Shandong Mining Machinery Group's current liabilities have increased over the last five years to 36% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 1.9%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

What We Can Learn From Shandong Mining Machinery Group's ROCE

In summary, it's unfortunate that Shandong Mining Machinery Group is generating lower returns from the same amount of capital. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 98% return. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a final note, we found 4 warning signs for Shandong Mining Machinery Group (1 is significant) you should be aware of.

While Shandong Mining Machinery Group 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.