What financial metrics can indicate to us that a company is maturing or even in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. 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 Zall Smart Commerce Group (HKG:2098), we've spotted some signs that it could be struggling, so let's investigate.

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. To calculate this metric for Zall Smart Commerce Group, this is the formula:

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

0.0071 = CN¥168m ÷ (CN¥64b - CN¥40b) (Based on the trailing twelve months to December 2023).

So, Zall Smart Commerce Group has an ROCE of 0.7%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 6.2%.

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

What Does the ROCE Trend For Zall Smart Commerce Group Tell Us?

The trend of ROCE at Zall Smart Commerce Group is showing some signs of weakness. To be more specific, today's ROCE was 1.3% five years ago but has since fallen to 0.7%. What's equally concerning is that the amount of capital deployed in the business has shrunk by 20% 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, Zall Smart Commerce Group's current liabilities have increased over the last five years to 63% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 0.7%. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

What We Can Learn From Zall Smart Commerce Group's ROCE

To see Zall Smart Commerce Group reducing the capital employed in the business in tandem with diminishing returns, is concerning. Long term shareholders who've owned the stock over the last five years have experienced a 55% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you'd like to know more about Zall Smart Commerce Group, we've spotted 4 warning signs, and 2 of them shouldn't be ignored.

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.

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