If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? 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. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after we looked into Shenzhen Ysstech Info-TechLtd (SZSE:300377), the trends above didn't look too great.

Understanding 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 Shenzhen Ysstech Info-TechLtd is:

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

0.02 = CN¥59m ÷ (CN¥3.2b - CN¥226m) (Based on the trailing twelve months to September 2024).

Therefore, Shenzhen Ysstech Info-TechLtd has an ROCE of 2.0%. On its own that's a low return on capital but it's in line with the industry's average returns of 2.3%.

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're interested in investigating Shenzhen Ysstech Info-TechLtd's past further, check out this free graph covering Shenzhen Ysstech Info-TechLtd's past earnings, revenue and cash flow.

What Does the ROCE Trend For Shenzhen Ysstech Info-TechLtd Tell Us?

We are a bit worried about the trend of returns on capital at Shenzhen Ysstech Info-TechLtd. To be more specific, the ROCE was 6.0% 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 Shenzhen Ysstech Info-TechLtd becoming one if things continue as they have.

The Key Takeaway

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 226% over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you want to know some of the risks facing Shenzhen Ysstech Info-TechLtd we've found 3 warning signs (2 are significant!) that you should be aware of before investing here.

While Shenzhen Ysstech Info-TechLtd 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.