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. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after we looked into Sunwave CommunicationsLtd (SZSE:002115), the trends above didn't look too great.

What Is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Sunwave CommunicationsLtd is:

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

0.025 = CN¥68m ÷ (CN¥4.4b - CN¥1.6b) (Based on the trailing twelve months to March 2024).

So, Sunwave CommunicationsLtd has an ROCE of 2.5%. Ultimately, that's a low return and it under-performs the Media industry average of 4.0%.

In the above chart we have measured Sunwave CommunicationsLtd'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 Sunwave CommunicationsLtd .

What Can We Tell From Sunwave CommunicationsLtd's ROCE Trend?

We are a bit worried about the trend of returns on capital at Sunwave CommunicationsLtd. About five years ago, returns on capital were 6.7%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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 Sunwave CommunicationsLtd to turn into a multi-bagger.

In Conclusion...

In summary, it's unfortunate that Sunwave CommunicationsLtd is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 48% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you want to continue researching Sunwave CommunicationsLtd, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Sunwave CommunicationsLtd 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.