What underlying fundamental trends can indicate that a company might be in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates the company is producing less profit from its investments and its total assets are decreasing. In light of that, from a first glance at Saimo TechnologyLtd (SZSE:300466), we've spotted some signs that it could be struggling, so let's investigate.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Saimo TechnologyLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.017 = CN¥15m ÷ (CN¥1.5b - CN¥584m) (Based on the trailing twelve months to September 2023).
Therefore, Saimo TechnologyLtd has an ROCE of 1.7%. Ultimately, that's a low return and it under-performs the Machinery industry average of 6.0%.
Check out our latest analysis for Saimo TechnologyLtd
Historical performance is a great place to start when researching a stock so above you can see the gauge for Saimo TechnologyLtd's ROCE against it's prior returns. If you'd like to look at how Saimo TechnologyLtd has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
We are a bit anxious about the trends of ROCE at Saimo TechnologyLtd. To be more specific, today's ROCE was 2.5% five years ago but has since fallen to 1.7%. In addition to that, Saimo TechnologyLtd is now employing 39% less capital than it was five years ago. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. If these underlying trends continue, we wouldn't be too optimistic going forward.
On a side note, Saimo TechnologyLtd's current liabilities have increased over the last five years to 40% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 1.7%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.
The Key Takeaway
In summary, it's unfortunate that Saimo TechnologyLtd is shrinking its capital base and also generating lower returns. In spite of that, the stock has delivered a 4.7% 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.
If you'd like to know about the risks facing Saimo TechnologyLtd, we've discovered 2 warning signs that you should be aware of.
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.
