When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. In light of that, from a first glance at GCL System Integration Technology (SZSE:002506), we've spotted some signs that it could be struggling, so let's investigate.

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

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. To calculate this metric for GCL System Integration Technology, this is the formula:

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

0.058 = CN¥223m ÷ (CN¥14b - CN¥10b) (Based on the trailing twelve months to September 2023).

Thus, GCL System Integration Technology has an ROCE of 5.8%. Even though it's in line with the industry average of 5.6%, it's still a low return by itself.

Historical performance is a great place to start when researching a stock so above you can see the gauge for GCL System Integration Technology'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 GCL System Integration Technology.

The Trend Of ROCE

We aren't too thrilled by the trend because ROCE has declined 35% over the last five years and despite the capital raising conducted before the latest reports, the business has -23% less capital employed.

On a separate but related note, it's important to know that GCL System Integration Technology has a current liabilities to total assets ratio of 73%, 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.

The Bottom Line

In summary, it's unfortunate that GCL System Integration Technology is shrinking its capital base and also generating lower returns. Long term shareholders who've owned the stock over the last five years have experienced a 50% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you want to continue researching GCL System Integration Technology, you might be interested to know about the 1 warning sign that our analysis has discovered.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.