Is Yulon Nissan Motor (TPE:2227) Struggling?

What underlying fundamental trends can indicate that a company might be in decline? 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 reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. In light of that, from a first glance at Yulon Nissan Motor (TPE:2227), we've spotted some signs that it could be struggling, so let's investigate.

What is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Yulon Nissan Motor:

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

0.03 = NT$689m ÷ (NT$28b - NT$4.7b) (Based on the trailing twelve months to September 2020).

Therefore, Yulon Nissan Motor has an ROCE of 3.0%. In absolute terms, that's a low return and it also under-performs the Auto industry average of 5.3%.

View our latest analysis for Yulon Nissan Motor

In the above chart we have measured Yulon Nissan Motor's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Yulon Nissan Motor.

What Can We Tell From Yulon Nissan Motor's ROCE Trend?

In terms of Yulon Nissan Motor's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 4.8%, 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. 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 Yulon Nissan Motor to turn into a multi-bagger.

What We Can Learn From Yulon Nissan Motor's ROCE

In summary, it's unfortunate that Yulon Nissan Motor is generating lower returns from the same amount of capital. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 57% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

On a final note, we found 2 warning signs for Yulon Nissan Motor (1 is potentially serious) you should be aware of.

While Yulon Nissan Motor 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. 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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