When researching a stock for investment, what can tell us that the company is in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. And from a first read, things don't look too good at Changzhou Langbo Sealing TechnologiesLtd (SHSE:603655), so let's see why.
Return On Capital Employed (ROCE): What Is It?
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 Changzhou Langbo Sealing TechnologiesLtd, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.021 = CN¥11m ÷ (CN¥570m - CN¥31m) (Based on the trailing twelve months to September 2023).
Therefore, Changzhou Langbo Sealing TechnologiesLtd has an ROCE of 2.1%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 5.8%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Changzhou Langbo Sealing TechnologiesLtd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Changzhou Langbo Sealing TechnologiesLtd.
What Does the ROCE Trend For Changzhou Langbo Sealing TechnologiesLtd Tell Us?
There is reason to be cautious about Changzhou Langbo Sealing TechnologiesLtd, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 6.8% that they were earning five years ago. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Changzhou Langbo Sealing TechnologiesLtd becoming one if things continue as they have.
In Conclusion...
In summary, it's unfortunate that Changzhou Langbo Sealing TechnologiesLtd is generating lower returns from the same amount of capital. In spite of that, the stock has delivered a 2.7% return to shareholders who held over 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.
If you want to know some of the risks facing Changzhou Langbo Sealing TechnologiesLtd we've found 3 warning signs (1 is a bit concerning!) that you should be aware of before investing here.
While Changzhou Langbo Sealing TechnologiesLtd 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.
