When researching a stock for investment, what can tell us that the company is 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. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. On that note, looking into Guangdong Ellington Electronics TechnologyLtd (SHSE:603328), we weren't too upbeat about how things were going.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Guangdong Ellington Electronics TechnologyLtd, this is the formula:

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

0.10 = CN¥399m ÷ (CN¥5.1b - CN¥1.2b) (Based on the trailing twelve months to December 2023).

Therefore, Guangdong Ellington Electronics TechnologyLtd has an ROCE of 10%. In absolute terms, that's a satisfactory return, but compared to the Electronic industry average of 5.5% it's much better.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Guangdong Ellington Electronics TechnologyLtd's ROCE against it's prior returns. If you'd like to look at how Guangdong Ellington Electronics TechnologyLtd has performed in the past in other metrics, you can view this free graph of Guangdong Ellington Electronics TechnologyLtd's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

There is reason to be cautious about Guangdong Ellington Electronics TechnologyLtd, given the returns are trending downwards. To be more specific, the ROCE was 15% 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. If these trends continue, we wouldn't expect Guangdong Ellington Electronics TechnologyLtd to turn into a multi-bagger.

Our Take On Guangdong Ellington Electronics TechnologyLtd's ROCE

In summary, it's unfortunate that Guangdong Ellington Electronics TechnologyLtd is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last five years have experienced a 32% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a final note, we found 2 warning signs for Guangdong Ellington Electronics TechnologyLtd (1 makes us a bit uncomfortable) you should be aware of.

While Guangdong Ellington Electronics TechnologyLtd 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.