If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? 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. 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 China Tianrui Automotive Interiors (HKG:6162), we weren't too hopeful.
Return On Capital Employed (ROCE): What Is It?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for China Tianrui Automotive Interiors, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.036 = CN¥9.5m ÷ (CN¥507m - CN¥246m) (Based on the trailing twelve months to June 2024).
So, China Tianrui Automotive Interiors has an ROCE of 3.6%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 6.0%.
See our latest analysis for China Tianrui Automotive Interiors
Historical performance is a great place to start when researching a stock so above you can see the gauge for China Tianrui Automotive Interiors' ROCE against it's prior returns. If you're interested in investigating China Tianrui Automotive Interiors' past further, check out this free graph covering China Tianrui Automotive Interiors' past earnings, revenue and cash flow.
What Does the ROCE Trend For China Tianrui Automotive Interiors Tell Us?
In terms of China Tianrui Automotive Interiors' historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 22% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on China Tianrui Automotive Interiors becoming one if things continue as they have.
Another thing to note, China Tianrui Automotive Interiors has a high ratio of current liabilities to total assets of 49%. 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.
The Bottom Line On China Tianrui Automotive Interiors' ROCE
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. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.
China Tianrui Automotive Interiors does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...
While China Tianrui Automotive Interiors may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.