Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. Having said that, after a brief look, Integrated Electronic Systems Lab (SZSE:002339) we aren't filled with optimism, but let's investigate further.

What Is Return On Capital Employed (ROCE)?

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 Integrated Electronic Systems Lab is:

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

0.052 = CN¥124m ÷ (CN¥4.2b - CN¥1.8b) (Based on the trailing twelve months to December 2023).

Therefore, Integrated Electronic Systems Lab has an ROCE of 5.2%. Ultimately, that's a low return and it under-performs the Electrical industry average of 6.6%.

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

What Can We Tell From Integrated Electronic Systems Lab's ROCE Trend?

There is reason to be cautious about Integrated Electronic Systems Lab, given the returns are trending downwards. To be more specific, the ROCE was 6.6% five years ago, but since then it has dropped noticeably. 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 Integrated Electronic Systems Lab to turn into a multi-bagger.

Another thing to note, Integrated Electronic Systems Lab has a high ratio of current liabilities to total assets of 43%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Integrated Electronic Systems Lab's ROCE

In summary, it's unfortunate that Integrated Electronic Systems Lab is generating lower returns from the same amount of capital. Despite the concerning underlying trends, the stock has actually gained 5.4% 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.

Like most companies, Integrated Electronic Systems Lab does come with some risks, and we've found 1 warning sign that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.