If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Sichuan Jiuyuan Yinhai Software.Co.Ltd (SZSE:002777) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Sichuan Jiuyuan Yinhai Software.Co.Ltd:

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

0.044 = CN¥79m ÷ (CN¥2.6b - CN¥782m) (Based on the trailing twelve months to June 2024).

So, Sichuan Jiuyuan Yinhai Software.Co.Ltd has an ROCE of 4.4%. On its own that's a low return, but compared to the average of 2.9% generated by the Software industry, it's much better.

Above you can see how the current ROCE for Sichuan Jiuyuan Yinhai Software.Co.Ltd 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 Sichuan Jiuyuan Yinhai Software.Co.Ltd for free.

What Does the ROCE Trend For Sichuan Jiuyuan Yinhai Software.Co.Ltd Tell Us?

On the surface, the trend of ROCE at Sichuan Jiuyuan Yinhai Software.Co.Ltd doesn't inspire confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 4.4%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line

We're a bit apprehensive about Sichuan Jiuyuan Yinhai Software.Co.Ltd because despite more capital being deployed in the business, returns on that capital and sales have both fallen. It should come as no surprise then that the stock has fallen 28% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One more thing to note, we've identified 3 warning signs with Sichuan Jiuyuan Yinhai Software.Co.Ltd and understanding these should be part of your investment process.

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.