Here's What's Concerning About Changshu Tianyin ElectromechanicalLtd's (SZSE:300342) Returns On Capital

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after glancing at the trends within Changshu Tianyin ElectromechanicalLtd (SZSE:300342), we weren't too hopeful.

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. To calculate this metric for Changshu Tianyin ElectromechanicalLtd, this is the formula:

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

0.05 = CN¥79m ÷ (CN¥2.2b - CN¥628m) (Based on the trailing twelve months to September 2024).

Thus, Changshu Tianyin ElectromechanicalLtd has an ROCE of 5.0%. On its own, that's a low figure but it's around the 5.8% average generated by the Electrical industry.

View our latest analysis for Changshu Tianyin ElectromechanicalLtd

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

What Can We Tell From Changshu Tianyin ElectromechanicalLtd's ROCE Trend?

We are a bit worried about the trend of returns on capital at Changshu Tianyin ElectromechanicalLtd. To be more specific, the ROCE was 8.0% 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. If these trends continue, we wouldn't expect Changshu Tianyin ElectromechanicalLtd to turn into a multi-bagger.

The Bottom Line On Changshu Tianyin ElectromechanicalLtd's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Yet despite these concerning fundamentals, the stock has performed strongly with a 97% return over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Changshu Tianyin ElectromechanicalLtd does have some risks, we noticed 4 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.