If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after glancing at the trends within INESA Intelligent Tech (SHSE:600602), we weren't too hopeful.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for INESA Intelligent Tech, this is the formula:

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

0.013 = CN¥64m ÷ (CN¥6.9b - CN¥2.0b) (Based on the trailing twelve months to March 2024).

Therefore, INESA Intelligent Tech has an ROCE of 1.3%. Ultimately, that's a low return and it under-performs the IT industry average of 3.9%.

In the above chart we have measured INESA Intelligent Tech's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for INESA Intelligent Tech .

What Can We Tell From INESA Intelligent Tech's ROCE Trend?

We are a bit worried about the trend of returns on capital at INESA Intelligent Tech. To be more specific, the ROCE was 1.8% 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. If these trends continue, we wouldn't expect INESA Intelligent Tech to turn into a multi-bagger.

The Bottom Line On INESA Intelligent Tech's ROCE

In summary, it's unfortunate that INESA Intelligent Tech is generating lower returns from the same amount of capital. Yet despite these concerning fundamentals, the stock has performed strongly with a 55% return over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

INESA Intelligent Tech could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 600602 on our platform quite valuable.

While INESA Intelligent Tech 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.