If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? 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. Basically the company is earning less on its investments and it is also reducing its total assets. So after we looked into Jiangsu Zhongchao Holding (SZSE:002471), the trends above didn't look too great.

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

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 Jiangsu Zhongchao Holding is:

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

0.0086 = CN¥15m ÷ (CN¥5.6b - CN¥3.8b) (Based on the trailing twelve months to June 2024).

Thus, Jiangsu Zhongchao Holding has an ROCE of 0.9%. Ultimately, that's a low return and it under-performs the Electrical industry average of 6.0%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Jiangsu Zhongchao Holding's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Jiangsu Zhongchao Holding.

How Are Returns Trending?

The trend of ROCE at Jiangsu Zhongchao Holding is showing some signs of weakness. To be more specific, today's ROCE was 11% five years ago but has since fallen to 0.9%. On top of that, the business is utilizing 33% less capital within its operations. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.

On a separate but related note, it's important to know that Jiangsu Zhongchao Holding has a current liabilities to total assets ratio of 69%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Jiangsu Zhongchao Holding's ROCE

To see Jiangsu Zhongchao Holding reducing the capital employed in the business in tandem with diminishing returns, is concerning. It should come as no surprise then that the stock has fallen 17% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you'd like to know more about Jiangsu Zhongchao Holding, we've spotted 3 warning signs, and 1 of them is a bit unpleasant.

While Jiangsu Zhongchao Holding 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.

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