To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. On that note, looking into Deewin Tianxia (HKG:2418), we weren't too upbeat about how things were going.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Deewin Tianxia is:

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

0.073 = CN¥274m ÷ (CN¥8.8b - CN¥5.0b) (Based on the trailing twelve months to June 2023).

So, Deewin Tianxia has an ROCE of 7.3%. On its own, that's a low figure but it's around the 8.3% average generated by the Transportation industry.

Check out our latest analysis for Deewin Tianxia

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 Deewin Tianxia's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Deewin Tianxia's ROCE Trending?

There is reason to be cautious about Deewin Tianxia, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 10% that they were earning three years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last three years. If these trends continue, we wouldn't expect Deewin Tianxia to turn into a multi-bagger.

On a side note, Deewin Tianxia has done well to pay down its current liabilities to 57% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Keep in mind 57% is still pretty high, so those risks are still somewhat prevalent.

The Bottom Line On Deewin Tianxia's ROCE

In summary, it's unfortunate that Deewin Tianxia is generating lower returns from the same amount of capital. Yet despite these poor fundamentals, the stock has gained a huge 151% over the last year, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One more thing to note, we've identified 2 warning signs with Deewin Tianxia and understanding them should be part of your investment process.

While Deewin Tianxia 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.