When researching a stock for investment, what can tell us that the company is in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. So after we looked into ZHEJIANG NARADA POWER SOURCE (SZSE:300068), the trends above didn't look too great.

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. The formula for this calculation on ZHEJIANG NARADA POWER SOURCE is:

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

0.063 = CN¥560m ÷ (CN¥19b - CN¥11b) (Based on the trailing twelve months to September 2023).

So, ZHEJIANG NARADA POWER SOURCE has an ROCE of 6.3%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.3%.

View our latest analysis for ZHEJIANG NARADA POWER SOURCE

Above you can see how the current ROCE for ZHEJIANG NARADA POWER SOURCE compares to its prior returns on capital, but there's only so much you can tell from the past. 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 ZHEJIANG NARADA POWER SOURCE's ROCE Trend?

There is reason to be cautious about ZHEJIANG NARADA POWER SOURCE, given the returns are trending downwards. About five years ago, returns on capital were 8.3%, 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. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect ZHEJIANG NARADA POWER SOURCE to turn into a multi-bagger.

On a side note, ZHEJIANG NARADA POWER SOURCE's current liabilities have increased over the last five years to 54% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

Our Take On ZHEJIANG NARADA POWER SOURCE's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors haven't taken kindly to these developments, since the stock has declined 11% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Like most companies, ZHEJIANG NARADA POWER SOURCE does come with some risks, and we've found 2 warning signs that you should be aware of.

While ZHEJIANG NARADA POWER SOURCE may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.