If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? 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 Wuxi Taiji Industry Limited (SHSE:600667), we weren't too upbeat about how things were going.

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

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. The formula for this calculation on Wuxi Taiji Industry Limited is:

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

0.065 = CN¥684m ÷ (CN¥31b - CN¥20b) (Based on the trailing twelve months to September 2023).

Therefore, Wuxi Taiji Industry Limited has an ROCE of 6.5%. On its own, that's a low figure but it's around the 5.8% average generated by the Semiconductor industry.

In the above chart we have measured Wuxi Taiji Industry Limited's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Wuxi Taiji Industry Limited .

What Does the ROCE Trend For Wuxi Taiji Industry Limited Tell Us?

There is reason to be cautious about Wuxi Taiji Industry Limited, given the returns are trending downwards. About five years ago, returns on capital were 9.4%, 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. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Wuxi Taiji Industry Limited becoming one if things continue as they have.

On a side note, Wuxi Taiji Industry Limited's current liabilities have increased over the last five years to 66% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

What We Can Learn From Wuxi Taiji Industry Limited's ROCE

In summary, it's unfortunate that Wuxi Taiji Industry Limited is generating lower returns from the same amount of capital. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Wuxi Taiji Industry Limited could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 600667 on our platform quite valuable.

While Wuxi Taiji Industry Limited 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.