Be Wary Of Tiande Chemical Holdings (HKG:609) And Its Returns On Capital

What financial metrics can indicate to us that a company is maturing or even in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. So after we looked into Tiande Chemical Holdings (HKG:609), the trends above didn't look too great.

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 Tiande Chemical Holdings is:

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

0.071 = CN¥104m ÷ (CN¥2.0b - CN¥487m) (Based on the trailing twelve months to June 2021).

Thus, Tiande Chemical Holdings has an ROCE of 7.1%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 12%.

View our latest analysis for Tiande Chemical Holdings

In the above chart we have measured Tiande Chemical Holdings' 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 report on analyst forecasts for the company.

What Can We Tell From Tiande Chemical Holdings' ROCE Trend?

There is reason to be cautious about Tiande Chemical Holdings, given the returns are trending downwards. About five years ago, returns on capital were 21%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Tiande Chemical Holdings to turn into a multi-bagger.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 25%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

The Bottom Line On Tiande Chemical Holdings' ROCE

In summary, it's unfortunate that Tiande Chemical Holdings is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 37% 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.

One more thing: We've identified 4 warning signs with Tiande Chemical Holdings (at least 1 which shouldn't be ignored) , and understanding these would certainly be useful.

While Tiande Chemical Holdings 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.