Returns On Capital At Changshu Tianyin ElectromechanicalLtd (SZSE:300342) Paint A Concerning Picture

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This indicates the company is producing less profit from its investments and its total assets are decreasing. On that note, looking into Changshu Tianyin ElectromechanicalLtd (SZSE:300342), we weren't too upbeat about how things were going.

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. The formula for this calculation on Changshu Tianyin ElectromechanicalLtd is:

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

0.029 = CN¥45m ÷ (CN¥2.2b - CN¥605m) (Based on the trailing twelve months to March 2024).

Therefore, Changshu Tianyin ElectromechanicalLtd has an ROCE of 2.9%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 6.0%.

View our latest analysis for Changshu Tianyin ElectromechanicalLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. 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.

The Trend Of ROCE

We are a bit worried about the trend of returns on capital at Changshu Tianyin ElectromechanicalLtd. About five years ago, returns on capital were 7.9%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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 Changshu Tianyin ElectromechanicalLtd becoming one if things continue as they have.

What We Can Learn From 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. Investors must expect better things on the horizon though because the stock has risen 38% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 5 warning signs for Changshu Tianyin ElectromechanicalLtd (of which 2 are potentially serious!) that 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.