Chengdu Leejun Industrial (SZSE:002651) Might Be Having Difficulty Using Its Capital Effectively

Simply Wall St · 10/18 22:56

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Chengdu Leejun Industrial (SZSE:002651) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. The formula for this calculation on Chengdu Leejun Industrial is:

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

0.03 = CN¥83m ÷ (CN¥3.3b - CN¥518m) (Based on the trailing twelve months to June 2024).

So, Chengdu Leejun Industrial has an ROCE of 3.0%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.5%.

See our latest analysis for Chengdu Leejun Industrial

roce
SZSE:002651 Return on Capital Employed October 18th 2024

Historical performance is a great place to start when researching a stock so above you can see the gauge for Chengdu Leejun Industrial's ROCE against it's prior returns. If you'd like to look at how Chengdu Leejun Industrial has performed in the past in other metrics, you can view this free graph of Chengdu Leejun Industrial's past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Chengdu Leejun Industrial's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 4.8%, but since then they've fallen to 3.0%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

What We Can Learn From Chengdu Leejun Industrial's ROCE

In summary, we're somewhat concerned by Chengdu Leejun Industrial's diminishing returns on increasing amounts of capital. In spite of that, the stock has delivered a 30% 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.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Chengdu Leejun Industrial (of which 1 shouldn't be ignored!) that you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.