When researching a stock for investment, what can tell us that the company is 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. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. 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.
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. 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)
0.038 = CN¥21m ÷ (CN¥701m - CN¥148m) (Based on the trailing twelve months to September 2023).
Thus, Jouder Precision Industry (Kunshan) has an ROCE of 3.8%. Ultimately, that's a low return and it under-performs the Machinery industry average of 6.1%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Jouder Precision Industry (Kunshan)'s ROCE against it's prior returns. 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).
What The Trend Of ROCE Can Tell Us
In terms of Jouder Precision Industry (Kunshan)'s historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 12%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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.
The Key Takeaway
In summary, it's unfortunate that Jouder Precision Industry (Kunshan) is generating lower returns from the same amount of capital. Despite the concerning underlying trends, the stock has actually gained 12% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.
One more thing: We've identified 2 warning signs with Jouder Precision Industry (Kunshan) (at least 1 which is concerning) , and understanding them would certainly be useful.
While Jouder Precision Industry (Kunshan) 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.
