How Well Is Leechi Machinery Industry (TPE:1517) Allocating Its Capital?

What underlying fundamental trends can indicate that a company might be 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 combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after glancing at the trends within Leechi Machinery Industry (TPE:1517), we weren't too hopeful.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Leechi Machinery Industry:

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

0.01 = NT$36m ÷ (NT$4.5b - NT$950m) (Based on the trailing twelve months to September 2020).

So, Leechi Machinery Industry has an ROCE of 1.0%. Ultimately, that's a low return and it under-performs the Leisure industry average of 12%.

Check out our latest analysis for Leechi Machinery Industry

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'd like to look at how Leechi Machinery Industry has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

We are a bit anxious about the trends of ROCE at Leechi Machinery Industry. To be more specific, today's ROCE was 3.2% five years ago but has since fallen to 1.0%. What's equally concerning is that the amount of capital deployed in the business has shrunk by 21% over that same period. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.

The Key Takeaway

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. However the stock has delivered a 48% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Leechi Machinery Industry (of which 1 makes us a bit uncomfortable!) that you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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