Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after we looked into Qingdao Eastsoft Communication TechnologyLtd (SZSE:300183), the trends above didn't look too great.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Qingdao Eastsoft Communication TechnologyLtd is:

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

0.024 = CN¥77m ÷ (CN¥3.4b - CN¥246m) (Based on the trailing twelve months to September 2023).

Thus, Qingdao Eastsoft Communication TechnologyLtd has an ROCE of 2.4%. Ultimately, that's a low return and it under-performs the Communications industry average of 5.1%.

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

What The Trend Of ROCE Can Tell Us

There is reason to be cautious about Qingdao Eastsoft Communication TechnologyLtd, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 4.5% that they were earning five years ago. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Qingdao Eastsoft Communication TechnologyLtd becoming one if things continue as they have.

In Conclusion...

In summary, it's unfortunate that Qingdao Eastsoft Communication TechnologyLtd is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 23% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Qingdao Eastsoft Communication TechnologyLtd does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...

While Qingdao Eastsoft Communication TechnologyLtd 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.