To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. 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. Basically the company is earning less on its investments and it is also reducing its total assets. In light of that, from a first glance at Jouder Precision Industry (Kunshan) (SZSE:300549), we've spotted some signs that it could be struggling, so let's investigate.

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

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 Jouder Precision Industry (Kunshan), this is the formula:

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

0.011 = CN¥5.8m ÷ (CN¥668m - CN¥114m) (Based on the trailing twelve months to March 2024).

Thus, Jouder Precision Industry (Kunshan) has an ROCE of 1.1%. Ultimately, that's a low return and it under-performs the Machinery industry average of 5.6%.

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 Jouder Precision Industry (Kunshan).

How Are Returns Trending?

There is reason to be cautious about Jouder Precision Industry (Kunshan), given the returns are trending downwards. About five years ago, returns on capital were 8.6%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Jouder Precision Industry (Kunshan) to turn into a multi-bagger.

On a related note, Jouder Precision Industry (Kunshan) has decreased its current liabilities to 17% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On Jouder Precision Industry (Kunshan)'s ROCE

In summary, it's unfortunate that Jouder Precision Industry (Kunshan) is generating lower returns from the same amount of capital. In spite of that, the stock has delivered a 37% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

If you want to know some of the risks facing Jouder Precision Industry (Kunshan) we've found 4 warning signs (2 make us uncomfortable!) that you should be aware of before investing here.

While Jouder Precision Industry (Kunshan) 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com