Guangdong Anjubao Digital Technology (SZSE:300155) Could Be At Risk Of Shrinking As A Company

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. 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. And from a first read, things don't look too good at Guangdong Anjubao Digital Technology (SZSE:300155), 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. To calculate this metric for Guangdong Anjubao Digital Technology, this is the formula:

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

0.0021 = CN¥2.8m ÷ (CN¥1.5b - CN¥141m) (Based on the trailing twelve months to March 2024).

So, Guangdong Anjubao Digital Technology has an ROCE of 0.2%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 8.4%.

See our latest analysis for Guangdong Anjubao Digital Technology

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 Guangdong Anjubao Digital Technology has performed in the past in other metrics, you can view this free graph of Guangdong Anjubao Digital Technology's past earnings, revenue and cash flow.

So How Is Guangdong Anjubao Digital Technology's ROCE Trending?

We are a bit worried about the trend of returns on capital at Guangdong Anjubao Digital Technology. About five years ago, returns on capital were 5.7%, 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 Guangdong Anjubao Digital Technology becoming one if things continue as they have.

On a related note, Guangdong Anjubao Digital Technology has decreased its current liabilities to 9.5% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Guangdong Anjubao Digital Technology'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. And long term shareholders have watched their investments stay flat over the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a final note, we've found 2 warning signs for Guangdong Anjubao Digital Technology that we think you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.