Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? 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 indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. On that note, looking into Der Future Science and Technology Holding Group (SZSE:002631), 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. Analysts use this formula to calculate it for Der Future Science and Technology Holding Group:

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

0.0043 = CN¥11m ÷ (CN¥4.2b - CN¥1.7b) (Based on the trailing twelve months to June 2024).

Therefore, Der Future Science and Technology Holding Group has an ROCE of 0.4%. Ultimately, that's a low return and it under-performs the Building industry average of 7.5%.

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

The Trend Of ROCE

There is reason to be cautious about Der Future Science and Technology Holding Group, given the returns are trending downwards. About five years ago, returns on capital were 5.7%, 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 Der Future Science and Technology Holding Group becoming one if things continue as they have.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 40%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 0.4%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

Our Take On Der Future Science and Technology Holding Group's ROCE

In summary, it's unfortunate that Der Future Science and Technology Holding Group is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 36% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Der Future Science and Technology Holding Group does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...

While Der Future Science and Technology Holding Group 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.