Argus (Shanghai) Textile ChemicalsLtd's (SHSE:603790) Returns On Capital Tell Us There Is Reason To Feel Uneasy

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. 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 Argus (Shanghai) Textile ChemicalsLtd (SHSE:603790), so let's see why.

Return On Capital Employed (ROCE): What Is It?

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 Argus (Shanghai) Textile ChemicalsLtd, this is the formula:

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

0.045 = CN¥58m ÷ (CN¥1.7b - CN¥435m) (Based on the trailing twelve months to March 2024).

Therefore, Argus (Shanghai) Textile ChemicalsLtd has an ROCE of 4.5%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.5%.

Check out our latest analysis for Argus (Shanghai) Textile ChemicalsLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Argus (Shanghai) Textile ChemicalsLtd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Argus (Shanghai) Textile ChemicalsLtd.

The Trend Of ROCE

There is reason to be cautious about Argus (Shanghai) Textile ChemicalsLtd, given the returns are trending downwards. To be more specific, the ROCE was 13% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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 Argus (Shanghai) Textile ChemicalsLtd becoming one if things continue as they have.

On a side note, Argus (Shanghai) Textile ChemicalsLtd's current liabilities have increased over the last five years to 25% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 4.5%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

In Conclusion...

In summary, it's unfortunate that Argus (Shanghai) Textile ChemicalsLtd is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 33% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Argus (Shanghai) Textile ChemicalsLtd does have some risks, we noticed 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

While Argus (Shanghai) Textile ChemicalsLtd 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.

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