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. Basically the company is earning less on its investments and it is also reducing its total assets. Having said that, after a brief look, Jiangsu Zhongchao Holding (SZSE:002471) we aren't filled with optimism, but let's investigate further.

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. Analysts use this formula to calculate it for Jiangsu Zhongchao Holding:

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

0.028 = CN¥50m ÷ (CN¥5.8b - CN¥4.0b) (Based on the trailing twelve months to September 2024).

So, Jiangsu Zhongchao Holding has an ROCE of 2.8%. Ultimately, that's a low return and it under-performs the Electrical industry average of 5.8%.

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Jiangsu Zhongchao Holding.

How Are Returns Trending?

The trend of ROCE at Jiangsu Zhongchao Holding is showing some signs of weakness. Unfortunately, returns have declined substantially over the last five years to the 2.8% we see today. On top of that, the business is utilizing 32% less capital within its operations. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. If these underlying trends continue, we wouldn't be too optimistic going forward.

Another thing to note, Jiangsu Zhongchao Holding has a high ratio of current liabilities to total assets of 69%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

To see Jiangsu Zhongchao Holding reducing the capital employed in the business in tandem with diminishing returns, is concerning. In spite of that, the stock has delivered a 36% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Jiangsu Zhongchao Holding does have some risks, we noticed 2 warning signs (and 1 which can't be ignored) we think you should know about.

While Jiangsu Zhongchao Holding 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.