Be Wary Of Zhejiang Yilida VentilatorLtd (SZSE:002686) And Its Returns On Capital

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? 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. 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. In light of that, from a first glance at Zhejiang Yilida VentilatorLtd (SZSE:002686), we've spotted some signs that it could be struggling, so let's investigate.

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. Analysts use this formula to calculate it for Zhejiang Yilida VentilatorLtd:

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

0.026 = CN¥49m ÷ (CN¥2.9b - CN¥1.1b) (Based on the trailing twelve months to September 2023).

Thus, Zhejiang Yilida VentilatorLtd has an ROCE of 2.6%. Ultimately, that's a low return and it under-performs the Building industry average of 6.8%.

Check out our latest analysis for Zhejiang Yilida VentilatorLtd

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

So How Is Zhejiang Yilida VentilatorLtd's ROCE Trending?

We are a bit anxious about the trends of ROCE at Zhejiang Yilida VentilatorLtd. The company used to generate 5.8% on its capital five years ago but it has since fallen noticeably. What's equally concerning is that the amount of capital deployed in the business has shrunk by 23% over that same period. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.

The Key Takeaway

To see Zhejiang Yilida VentilatorLtd reducing the capital employed in the business in tandem with diminishing returns, is concerning. Long term shareholders who've owned the stock over the last five years have experienced a 45% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Zhejiang Yilida VentilatorLtd does have some risks though, and we've spotted 1 warning sign for Zhejiang Yilida VentilatorLtd that you might be interested in.

While Zhejiang Yilida VentilatorLtd 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.