When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. 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. This indicates the company is producing less profit from its investments and its total assets are decreasing. In light of that, from a first glance at Jiangsu Hoperun Software (SZSE:300339), we've spotted some signs that it could be struggling, so let's investigate.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Jiangsu Hoperun Software, this is the formula:

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

0.028 = CN¥110m ÷ (CN¥5.6b - CN¥1.7b) (Based on the trailing twelve months to September 2024).

Therefore, Jiangsu Hoperun Software has an ROCE of 2.8%. In absolute terms, that's a low return but it's around the Software industry average of 2.3%.

Above you can see how the current ROCE for Jiangsu Hoperun Software compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Jiangsu Hoperun Software .

What Does the ROCE Trend For Jiangsu Hoperun Software Tell Us?

The trend of ROCE at Jiangsu Hoperun Software is showing some signs of weakness. Unfortunately, returns have declined substantially over the last five years to the 2.8% we see today. What's equally concerning is that the amount of capital deployed in the business has shrunk by 26% over that same period. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.

On a side note, Jiangsu Hoperun Software's current liabilities have increased over the last five years to 31% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 2.8%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

Our Take On Jiangsu Hoperun Software's ROCE

To see Jiangsu Hoperun Software reducing the capital employed in the business in tandem with diminishing returns, is concerning. Since the stock has skyrocketed 333% over the last five years, it looks like investors have high expectations of the stock. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

One final note, you should learn about the 2 warning signs we've spotted with Jiangsu Hoperun Software (including 1 which is significant) .

While Jiangsu Hoperun Software 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.