Zhejiang Yonggui Electric Equipment (SZSE:300351) May Have Issues Allocating Its Capital

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. 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. 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. And from a first read, things don't look too good at Zhejiang Yonggui Electric Equipment (SZSE:300351), so let's see why.

What Is 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 Zhejiang Yonggui Electric Equipment is:

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

0.031 = CN¥74m ÷ (CN¥3.0b - CN¥547m) (Based on the trailing twelve months to September 2023).

Therefore, Zhejiang Yonggui Electric Equipment has an ROCE of 3.1%. Ultimately, that's a low return and it under-performs the Electrical industry average of 6.4%.

Check out our latest analysis for Zhejiang Yonggui Electric Equipment

In the above chart we have measured Zhejiang Yonggui Electric Equipment's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Zhejiang Yonggui Electric Equipment .

What The Trend Of ROCE Can Tell Us

The trend of ROCE at Zhejiang Yonggui Electric Equipment is showing some signs of weakness. To be more specific, today's ROCE was 5.6% five years ago but has since fallen to 3.1%. What's equally concerning is that the amount of capital deployed in the business has shrunk by 21% over that same period. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

What We Can Learn From Zhejiang Yonggui Electric Equipment's ROCE

In summary, it's unfortunate that Zhejiang Yonggui Electric Equipment is shrinking its capital base and also generating lower returns. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 67% 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.

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

While Zhejiang Yonggui Electric Equipment 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.