When researching a stock for investment, what can tell us that the company is in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. And from a first read, things don't look too good at Longmaster Information & Technology (SZSE:300288), 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. To calculate this metric for Longmaster Information & Technology, this is the formula:

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

0.027 = CN¥46m ÷ (CN¥1.9b - CN¥208m) (Based on the trailing twelve months to September 2024).

Thus, Longmaster Information & Technology has an ROCE of 2.7%. On its own that's a low return, but compared to the average of 1.8% generated by the Healthcare Services industry, it's much better.

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Longmaster Information & Technology has performed in the past in other metrics, you can view this free graph of Longmaster Information & Technology's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of Longmaster Information & Technology's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 4.8% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Longmaster Information & Technology becoming one if things continue as they have.

The Key Takeaway

In summary, it's unfortunate that Longmaster Information & Technology is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 30% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

While Longmaster Information & Technology doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation for 300288 on our platform.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.