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 reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. Having said that, after a brief look, Ningbo Shuanglin Auto PartsLtd (SZSE:300100) we aren't filled with optimism, but let's investigate further.
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. The formula for this calculation on Ningbo Shuanglin Auto PartsLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.066 = CN¥173m ÷ (CN¥5.5b - CN¥2.9b) (Based on the trailing twelve months to September 2023).
Therefore, Ningbo Shuanglin Auto PartsLtd has an ROCE of 6.6%. In absolute terms, that's a low return but it's around the Auto Components industry average of 5.8%.
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 , check out these free graphs detailing revenue and cash flow performance of Ningbo Shuanglin Auto PartsLtd.
The Trend Of ROCE
We aren't inspired by the trend, given ROCE has reduced by 40% over the last five years and Ningbo Shuanglin Auto PartsLtd is applying -39% less capital in the business, even after the capital raising they conducted (prior to their latest reported figures).
On a separate but related note, it's important to know that Ningbo Shuanglin Auto PartsLtd has a current liabilities to total assets ratio of 52%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
What We Can Learn From Ningbo Shuanglin Auto PartsLtd's ROCE
In summary, it's unfortunate that Ningbo Shuanglin Auto PartsLtd is shrinking its capital base and also generating lower returns. Long term shareholders who've owned the stock over the last five years have experienced a 18% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
Ningbo Shuanglin Auto PartsLtd does have some risks though, and we've spotted 2 warning signs for Ningbo Shuanglin Auto PartsLtd that you might be interested in.
While Ningbo Shuanglin Auto PartsLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
