Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. Having said that, after a brief look, Zhejiang Tiancheng Controls (SHSE:603085) we aren't filled with optimism, but let's investigate further.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Zhejiang Tiancheng Controls, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.023 = CN¥33m ÷ (CN¥2.9b - CN¥1.5b) (Based on the trailing twelve months to June 2024).

Therefore, Zhejiang Tiancheng Controls has an ROCE of 2.3%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 7.7%.

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're interested in investigating Zhejiang Tiancheng Controls' past further, check out this free graph covering Zhejiang Tiancheng Controls' past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Zhejiang Tiancheng Controls' historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 3.2% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Zhejiang Tiancheng Controls to turn into a multi-bagger.

Another thing to note, Zhejiang Tiancheng Controls has a high ratio of current liabilities to total assets of 52%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Zhejiang Tiancheng Controls' ROCE

In summary, it's unfortunate that Zhejiang Tiancheng Controls is generating lower returns from the same amount of capital. And long term shareholders have watched their investments stay flat over the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Zhejiang Tiancheng Controls does have some risks though, and we've spotted 1 warning sign for Zhejiang Tiancheng Controls that you might be interested in.

While Zhejiang Tiancheng Controls 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.