What underlying fundamental trends can indicate that a company might be 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. This indicates the company is producing less profit from its investments and its total assets are decreasing. And from a first read, things don't look too good at GUILIN FUDALtd (SHSE:603166), so let's see why.
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. To calculate this metric for GUILIN FUDALtd, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.024 = CN¥60m ÷ (CN¥3.4b - CN¥956m) (Based on the trailing twelve months to September 2023).
Therefore, GUILIN FUDALtd has an ROCE of 2.4%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 5.8%.
Check out our latest analysis for GUILIN FUDALtd
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 GUILIN FUDALtd, check out these free graphs here.
What Can We Tell From GUILIN FUDALtd's ROCE Trend?
We are a bit worried about the trend of returns on capital at GUILIN FUDALtd. Unfortunately the returns on capital have diminished from the 4.7% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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 GUILIN FUDALtd to turn into a multi-bagger.
The Key Takeaway
In summary, it's unfortunate that GUILIN FUDALtd is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 39% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.
On a final note, we found 3 warning signs for GUILIN FUDALtd (1 is concerning) you should be aware of.
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. 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.