When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates the company is producing less profit from its investments and its total assets are decreasing. And from a first read, things don't look too good at Jiangsu Hoperun Software (SZSE:300339), so let's see why.

What Is Return On Capital Employed (ROCE)?

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 Hoperun Software is:

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

0.03 = CN¥117m ÷ (CN¥5.0b - CN¥1.1b) (Based on the trailing twelve months to March 2024).

So, Jiangsu Hoperun Software has an ROCE of 3.0%. Even though it's in line with the industry average of 3.2%, it's still a low return by itself.

Above you can see how the current ROCE for Jiangsu Hoperun Software compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Jiangsu Hoperun Software for free.

So How Is Jiangsu Hoperun Software's ROCE Trending?

In terms of Jiangsu Hoperun Software's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 7.1% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Jiangsu Hoperun Software becoming one if things continue as they have.

What We Can Learn From Jiangsu Hoperun Software's ROCE

In summary, it's unfortunate that Jiangsu Hoperun Software is generating lower returns from the same amount of capital. Yet despite these concerning fundamentals, the stock has performed strongly with a 72% 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.

Like most companies, Jiangsu Hoperun Software does come with some risks, and we've found 1 warning sign that you should be aware of.

While Jiangsu Hoperun Software 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.