Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. Having said that, after a brief look, Zhejiang Zomax Transmission (SHSE:603767) we aren't filled with optimism, but let's investigate further.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Zhejiang Zomax Transmission:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.033 = CN¥50m ÷ (CN¥1.9b - CN¥381m) (Based on the trailing twelve months to September 2023).
So, Zhejiang Zomax Transmission has an ROCE of 3.3%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 5.8%.
View our latest analysis for Zhejiang Zomax Transmission
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 want to delve into the historical earnings, revenue and cash flow of Zhejiang Zomax Transmission, check out these free graphs here.
How Are Returns Trending?
There is reason to be cautious about Zhejiang Zomax Transmission, given the returns are trending downwards. To be more specific, the ROCE was 4.3% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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 Zomax Transmission to turn into a multi-bagger.
What We Can Learn From Zhejiang Zomax Transmission's ROCE
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. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 165%. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.
Zhejiang Zomax Transmission does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those shouldn't be ignored...
While Zhejiang Zomax Transmission 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.