When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. 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. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after glancing at the trends within Guangdong Orient Zirconic Ind Sci & TechLtd (SZSE:002167), we weren't too hopeful.
Understanding 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 Guangdong Orient Zirconic Ind Sci & TechLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0045 = CN¥7.1m ÷ (CN¥3.7b - CN¥2.1b) (Based on the trailing twelve months to September 2023).
So, Guangdong Orient Zirconic Ind Sci & TechLtd has an ROCE of 0.4%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 5.9%.
View our latest analysis for Guangdong Orient Zirconic Ind Sci & TechLtd
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're interested in investigating Guangdong Orient Zirconic Ind Sci & TechLtd's past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Guangdong Orient Zirconic Ind Sci & TechLtd Tell Us?
We are a bit worried about the trend of returns on capital at Guangdong Orient Zirconic Ind Sci & TechLtd. To be more specific, the ROCE was 3.7% five years ago, but since then it has dropped noticeably. 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 Guangdong Orient Zirconic Ind Sci & TechLtd to turn into a multi-bagger.
While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 58%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.
In Conclusion...
In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. In spite of that, the stock has delivered a 21% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.
Guangdong Orient Zirconic Ind Sci & TechLtd could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.
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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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.
