What underlying fundamental trends can indicate that a company might be in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. In light of that, from a first glance at JC Finance & Tax Interconnect Holdings (SZSE:002530), we've spotted some signs that it could be struggling, so let's investigate.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for JC Finance & Tax Interconnect Holdings:

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

0.0085 = CN¥14m ÷ (CN¥2.6b - CN¥969m) (Based on the trailing twelve months to September 2024).

Therefore, JC Finance & Tax Interconnect Holdings has an ROCE of 0.8%. Ultimately, that's a low return and it under-performs the Machinery industry average of 5.2%.

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of JC Finance & Tax Interconnect Holdings.

What Does the ROCE Trend For JC Finance & Tax Interconnect Holdings Tell Us?

The trend of returns that JC Finance & Tax Interconnect Holdings is generating are raising some concerns. Unfortunately, returns have declined substantially over the last five years to the 0.8% we see today. In addition to that, JC Finance & Tax Interconnect Holdings is now employing 65% less capital than it was five years ago. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. If these underlying trends continue, we wouldn't be too optimistic going forward.

On a side note, JC Finance & Tax Interconnect Holdings' current liabilities have increased over the last five years to 38% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 0.8%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

The Key Takeaway

In summary, it's unfortunate that JC Finance & Tax Interconnect Holdings is shrinking its capital base and also generating lower returns. It should come as no surprise then that the stock has fallen 12% 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.

JC Finance & Tax Interconnect Holdings could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 002530 on our platform quite valuable.

While JC Finance & Tax Interconnect Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.