What financial metrics can indicate to us that a company is maturing or even in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. In light of that, from a first glance at Shenzhen Ysstech Info-TechLtd (SZSE:300377), 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. The formula for this calculation on Shenzhen Ysstech Info-TechLtd is:

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

0.023 = CN¥67m ÷ (CN¥3.2b - CN¥233m) (Based on the trailing twelve months to March 2024).

Therefore, Shenzhen Ysstech Info-TechLtd has an ROCE of 2.3%. Ultimately, that's a low return and it under-performs the Software industry average of 3.0%.

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

What Can We Tell From Shenzhen Ysstech Info-TechLtd's ROCE Trend?

We are a bit worried about the trend of returns on capital at Shenzhen Ysstech Info-TechLtd. To be more specific, the ROCE was 5.7% 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. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Shenzhen Ysstech Info-TechLtd to turn into a multi-bagger.

The Key Takeaway

In summary, it's unfortunate that Shenzhen Ysstech Info-TechLtd 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 42% 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.

Shenzhen Ysstech Info-TechLtd does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is significant...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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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