Be Wary Of Guangdong Silver Age Sci & TechLtd (SZSE:300221) And Its Returns On Capital

What underlying fundamental trends can indicate that a company might be in decline? 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. And from a first read, things don't look too good at Guangdong Silver Age Sci & TechLtd (SZSE:300221), so let's see why.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Guangdong Silver Age Sci & TechLtd is:

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

0.028 = CN¥39m ÷ (CN¥1.8b - CN¥432m) (Based on the trailing twelve months to September 2023).

Therefore, Guangdong Silver Age Sci & TechLtd has an ROCE of 2.8%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 5.7%.

Check out our latest analysis for Guangdong Silver Age Sci & TechLtd

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

The Trend Of ROCE

The trend of ROCE at Guangdong Silver Age Sci & TechLtd is showing some signs of weakness. To be more specific, today's ROCE was 5.1% five years ago but has since fallen to 2.8%. On top of that, the business is utilizing 43% less capital within its operations. 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.

The Key Takeaway

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. Long term shareholders who've owned the stock over the last five years have experienced a 40% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Guangdong Silver Age Sci & TechLtd could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 300221 on our platform quite valuable.

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.