What underlying fundamental trends can indicate that a company might be in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. 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 China Tianrui Automotive Interiors (HKG:6162), we weren't too hopeful.
Our free stock report includes 3 warning signs investors should be aware of before investing in China Tianrui Automotive Interiors. Read for free now.What Is Return On Capital Employed (ROCE)?
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)
0.032 = CN¥9.1m ÷ (CN¥624m - CN¥338m) (Based on the trailing twelve months to December 2024).
Therefore, China Tianrui Automotive Interiors has an ROCE of 3.2%. In absolute terms, that's a low return but it's around the Auto Components industry average of 4.0%.
See our latest analysis for China Tianrui Automotive Interiors
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 China Tianrui Automotive Interiors.
What The Trend Of ROCE Can Tell Us
In terms of China Tianrui Automotive Interiors' historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 24% five years ago, but since then it has dropped noticeably. 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 China Tianrui Automotive Interiors becoming one if things continue as they have.
On a side note, China Tianrui Automotive Interiors' current liabilities are still rather high at 54% of total assets. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
Our Take On China Tianrui Automotive Interiors' ROCE
In summary, it's unfortunate that China Tianrui Automotive Interiors is generating lower returns from the same amount of capital. In spite of that, the stock has delivered a 8.9% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.
China Tianrui Automotive Interiors does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...
While China Tianrui Automotive Interiors 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.