When researching a stock for investment, what can tell us that the company is 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. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after we looked into Weihai Guangtai Airport EquipmentLtd (SZSE:002111), the trends above didn't look too great.
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. The formula for this calculation on Weihai Guangtai Airport EquipmentLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.063 = CN¥219m ÷ (CN¥5.9b - CN¥2.4b) (Based on the trailing twelve months to June 2023).
Thus, Weihai Guangtai Airport EquipmentLtd has an ROCE of 6.3%. Even though it's in line with the industry average of 6.4%, it's still a low return by itself.
See our latest analysis for Weihai Guangtai Airport EquipmentLtd
In the above chart we have measured Weihai Guangtai Airport EquipmentLtd'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 Weihai Guangtai Airport EquipmentLtd.
What Can We Tell From Weihai Guangtai Airport EquipmentLtd's ROCE Trend?
In terms of Weihai Guangtai Airport EquipmentLtd's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 8.7%, 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. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Weihai Guangtai Airport EquipmentLtd to turn into a multi-bagger.
Another thing to note, Weihai Guangtai Airport EquipmentLtd has a high ratio of current liabilities to total assets of 41%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
The Key Takeaway
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. 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. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.
If you want to know some of the risks facing Weihai Guangtai Airport EquipmentLtd we've found 2 warning signs (1 is a bit concerning!) that you should be aware of before investing here.
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.