What financial metrics can indicate to us that a company is maturing or even in decline? 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 indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. On that note, looking into Kuangda Technology Group (SZSE:002516), we weren't too upbeat about how things were going.

What Is 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 Kuangda Technology Group is:

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

0.06 = CN¥215m ÷ (CN¥4.1b - CN¥500m) (Based on the trailing twelve months to June 2023).

Therefore, Kuangda Technology Group has an ROCE of 6.0%. In absolute terms, that's a low return but it's around the Luxury industry average of 5.3%.

See our latest analysis for Kuangda Technology Group

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 Kuangda Technology Group's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Kuangda Technology Group Tell Us?

There is reason to be cautious about Kuangda Technology Group, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 8.8% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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 Kuangda Technology Group to turn into a multi-bagger.

The Bottom Line On Kuangda Technology Group's ROCE

In summary, it's unfortunate that Kuangda Technology Group is generating lower returns from the same amount of capital. Since the stock has skyrocketed 111% over the last five years, it looks like investors have high expectations of the stock. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Kuangda Technology Group does have some risks though, and we've spotted 1 warning sign for Kuangda Technology Group that you might be interested in.

While Kuangda Technology Group 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.