What financial metrics can indicate to us that a company is maturing or even in decline? 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. 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 SEC Electric Machinery (SHSE:603988), the trends above didn't look too great.

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 SEC Electric Machinery, this is the formula:

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

0.05 = CN¥35m ÷ (CN¥1.1b - CN¥414m) (Based on the trailing twelve months to September 2024).

Thus, SEC Electric Machinery has an ROCE of 5.0%. In absolute terms, that's a low return but it's around the Electrical industry average of 5.9%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for SEC Electric Machinery's ROCE against it's prior returns. If you're interested in investigating SEC Electric Machinery's past further, check out this free graph covering SEC Electric Machinery's past earnings, revenue and cash flow.

So How Is SEC Electric Machinery's ROCE Trending?

There is reason to be cautious about SEC Electric Machinery, given the returns are trending downwards. To be more specific, the ROCE was 6.3% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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. If these trends continue, we wouldn't expect SEC Electric Machinery to turn into a multi-bagger.

In Conclusion...

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Yet despite these poor fundamentals, the stock has gained a huge 110% 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.

SEC Electric Machinery does have some risks, we noticed 3 warning signs (and 1 which shouldn't be ignored) we think you should know about.

While SEC Electric Machinery 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.