Some Investors May Be Worried About Shanghai YongLi Belting's (SZSE:300230) Returns On Capital

What financial metrics can indicate to us that a company is maturing or even 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 indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after glancing at the trends within Shanghai YongLi Belting (SZSE:300230), we weren't too hopeful.

Understanding 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 Shanghai YongLi Belting:

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

0.07 = CN¥234m ÷ (CN¥4.2b - CN¥855m) (Based on the trailing twelve months to June 2024).

Therefore, Shanghai YongLi Belting has an ROCE of 7.0%. On its own that's a low return, but compared to the average of 5.5% generated by the Machinery industry, it's much better.

View our latest analysis for Shanghai YongLi Belting

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shanghai YongLi Belting's ROCE against it's prior returns. If you're interested in investigating Shanghai YongLi Belting's past further, check out this free graph covering Shanghai YongLi Belting's past earnings, revenue and cash flow.

So How Is Shanghai YongLi Belting's ROCE Trending?

There is reason to be cautious about Shanghai YongLi Belting, given the returns are trending downwards. To be more specific, the ROCE was 12% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Shanghai YongLi Belting becoming one if things continue as they have.

Our Take On Shanghai YongLi Belting's ROCE

In summary, it's unfortunate that Shanghai YongLi Belting is generating lower returns from the same amount of capital. Despite the concerning underlying trends, the stock has actually gained 7.0% over the last five years, so it might be that the investors are expecting the trends to reverse. 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 to note, we've identified 2 warning signs with Shanghai YongLi Belting and understanding these should be part of your investment process.

While Shanghai YongLi Belting 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.