Should You Be Worried About Leechi Machinery Industry's (TPE:1517) Returns On Capital?

What financial metrics can indicate to us that a company is maturing or even in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. 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 Leechi Machinery Industry (TPE:1517), we've spotted some signs that it could be struggling, so let's investigate.

What is 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).

Thus, Leechi Machinery Industry has an ROCE of 1.0%. In absolute terms, that's a low return and it also under-performs the Leisure industry average of 12%.

Check out our latest analysis for Leechi Machinery Industry

Historical performance is a great place to start when researching a stock so above you can see the gauge for Leechi Machinery Industry's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Leechi Machinery Industry, check out these free graphs here.

How Are Returns Trending?

We are a bit anxious about the trends of ROCE at Leechi Machinery Industry. The company used to generate 3.2% on its capital five years ago but it has since fallen noticeably. On top of that, the business is utilizing 21% less capital within its operations. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. 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.

In Conclusion...

In summary, it's unfortunate that Leechi Machinery Industry is shrinking its capital base and also generating lower returns. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 41% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Leechi Machinery Industry does have some risks, we noticed 3 warning signs (and 1 which is significant) we think you should know about.

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. 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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