If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after glancing at the trends within Zhejiang Founder Motor (SZSE:002196), we weren't too hopeful.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Zhejiang Founder Motor is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0001 = CN¥203k ÷ (CN¥4.2b - CN¥2.2b) (Based on the trailing twelve months to March 2024).
So, Zhejiang Founder Motor has an ROCE of 0.01%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 6.9%.
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'd like to look at how Zhejiang Founder Motor has performed in the past in other metrics, you can view this free graph of Zhejiang Founder Motor's past earnings, revenue and cash flow.
What Does the ROCE Trend For Zhejiang Founder Motor Tell Us?
In terms of Zhejiang Founder Motor's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 0.7%, however they're now substantially lower than that as we saw above. 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 Zhejiang Founder Motor becoming one if things continue as they have.
While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 53%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 0.01%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.
The Bottom Line
All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
If you want to continue researching Zhejiang Founder Motor, you might be interested to know about the 1 warning sign that our analysis has discovered.
While Zhejiang Founder Motor isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.
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