When researching a stock for investment, what can tell us that the company is in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. On that note, looking into Sumavision TechnologiesLtd (SZSE:300079), we weren't too upbeat about how things were going.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Sumavision TechnologiesLtd is:

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

0.0045 = CN¥19m ÷ (CN¥4.6b - CN¥325m) (Based on the trailing twelve months to September 2023).

Therefore, Sumavision TechnologiesLtd has an ROCE of 0.4%. In absolute terms, that's a low return and it also under-performs the Communications industry average of 5.1%.

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

What Can We Tell From Sumavision TechnologiesLtd's ROCE Trend?

We are a bit worried about the trend of returns on capital at Sumavision TechnologiesLtd. Unfortunately the returns on capital have diminished from the 2.1% that they were earning five years ago. 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. If these trends continue, we wouldn't expect Sumavision TechnologiesLtd to turn into a multi-bagger.

On a side note, Sumavision TechnologiesLtd has done well to pay down its current liabilities to 7.1% 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.

What We Can Learn From Sumavision TechnologiesLtd's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. In spite of that, the stock has delivered a 3.6% 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.

On a final note, we've found 2 warning signs for Sumavision TechnologiesLtd that we think you should be aware of.

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.

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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.