If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. 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. And from a first read, things don't look too good at Zhejiang Semir Garment (SZSE:002563), so let's see why.

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

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. The formula for this calculation on Zhejiang Semir Garment is:

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

0.12 = CN¥1.4b ÷ (CN¥17b - CN¥5.2b) (Based on the trailing twelve months to June 2024).

So, Zhejiang Semir Garment has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 7.1% generated by the Luxury industry.

Above you can see how the current ROCE for Zhejiang Semir Garment compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Zhejiang Semir Garment for free.

What Does the ROCE Trend For Zhejiang Semir Garment Tell Us?

We are a bit worried about the trend of returns on capital at Zhejiang Semir Garment. About five years ago, returns on capital were 20%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Zhejiang Semir Garment to turn into a multi-bagger.

What We Can Learn From Zhejiang Semir Garment's ROCE

In summary, it's unfortunate that Zhejiang Semir Garment is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last five years have experienced a 46% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a final note, we've found 1 warning sign for Zhejiang Semir Garment that we think you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.