Returns On Capital Signal Difficult Times Ahead For CRCC High-Tech Equipment (HKG:1786)

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. 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 CRCC High-Tech Equipment (HKG:1786), 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 CRCC High-Tech Equipment is:

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

0.0021 = CN¥12m ÷ (CN¥8.0b - CN¥2.5b) (Based on the trailing twelve months to June 2021).

Therefore, CRCC High-Tech Equipment has an ROCE of 0.2%. Ultimately, that's a low return and it under-performs the Machinery industry average of 10.0%.

View our latest analysis for CRCC High-Tech Equipment

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 want to delve into the historical earnings, revenue and cash flow of CRCC High-Tech Equipment, check out these free graphs here.

So How Is CRCC High-Tech Equipment's ROCE Trending?

In terms of CRCC High-Tech Equipment's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 8.6% that they were earning five years ago. 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. If these trends continue, we wouldn't expect CRCC High-Tech Equipment to turn into a multi-bagger.

The Key Takeaway

In summary, it's unfortunate that CRCC High-Tech Equipment is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 66% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a final note, we've found 1 warning sign for CRCC High-Tech Equipment that we think you should be aware of.

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.