To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. 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. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. On that note, looking into Zhejiang VIE Science & Technology (SZSE:002590), we weren't too upbeat about how things were going.

What Is Return On Capital Employed (ROCE)?

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 Zhejiang VIE Science & Technology:

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

0.026 = CN¥65m ÷ (CN¥5.0b - CN¥2.5b) (Based on the trailing twelve months to September 2023).

Therefore, Zhejiang VIE Science & Technology has an ROCE of 2.6%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 5.8%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zhejiang VIE Science & Technology's ROCE against it's prior returns. If you're interested in investigating Zhejiang VIE Science & Technology's past further, check out this free graph covering Zhejiang VIE Science & Technology's past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Zhejiang VIE Science & Technology's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 10% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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 Zhejiang VIE Science & Technology to turn into a multi-bagger.

On a separate but related note, it's important to know that Zhejiang VIE Science & Technology has a current liabilities to total assets ratio of 51%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Zhejiang VIE Science & Technology's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Yet despite these concerning fundamentals, the stock has performed strongly with a 43% return over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you'd like to know more about Zhejiang VIE Science & Technology, we've spotted 2 warning signs, and 1 of them is potentially serious.

While Zhejiang VIE Science & Technology 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.