Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after glancing at the trends within Nanjing Kangni Mechanical & ElectricalLtd (SHSE:603111), 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 Nanjing Kangni Mechanical & ElectricalLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.072 = CN¥296m ÷ (CN¥5.9b - CN¥1.7b) (Based on the trailing twelve months to September 2023).
Therefore, Nanjing Kangni Mechanical & ElectricalLtd has an ROCE of 7.2%. On its own that's a low return, but compared to the average of 6.0% generated by the Machinery industry, it's much better.
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 Nanjing Kangni Mechanical & ElectricalLtd.
The Trend Of ROCE
There is reason to be cautious about Nanjing Kangni Mechanical & ElectricalLtd, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 9.7% 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. If these trends continue, we wouldn't expect Nanjing Kangni Mechanical & ElectricalLtd to turn into a multi-bagger.
The Bottom Line On Nanjing Kangni Mechanical & ElectricalLtd's ROCE
In summary, it's unfortunate that Nanjing Kangni Mechanical & ElectricalLtd is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 19% in 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.
Nanjing Kangni Mechanical & ElectricalLtd could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 603111 on our platform quite valuable.
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.
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.