Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? 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 combination can tell you that not only is the company investing less, it's earning less on what it does invest. Having said that, after a brief look, Eternal Asia Supply Chain Management (SZSE:002183) we aren't filled with optimism, but let's investigate further.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Eternal Asia Supply Chain Management:

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

0.084 = CN¥1.2b ÷ (CN¥51b - CN¥38b) (Based on the trailing twelve months to March 2024).

So, Eternal Asia Supply Chain Management has an ROCE of 8.4%. On its own that's a low return, but compared to the average of 5.5% generated by the Commercial 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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Eternal Asia Supply Chain Management.

What Does the ROCE Trend For Eternal Asia Supply Chain Management Tell Us?

We are a bit worried about the trend of returns on capital at Eternal Asia Supply Chain Management. 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 Eternal Asia Supply Chain Management to turn into a multi-bagger.

On a separate but related note, it's important to know that Eternal Asia Supply Chain Management has a current liabilities to total assets ratio of 73%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Eternal Asia Supply Chain Management's ROCE

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. Investors haven't taken kindly to these developments, since the stock has declined 28% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Eternal Asia Supply Chain Management does have some risks, we noticed 3 warning signs (and 1 which can't be ignored) we think you should know about.

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.

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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.