What financial metrics can indicate to us that a company is maturing or even in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. So after glancing at the trends within Guangdong Shenglu Telecommunication Tech (SZSE:002446), we weren't too hopeful.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Guangdong Shenglu Telecommunication Tech, this is the formula:

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

0.02 = CN¥70m ÷ (CN¥4.3b - CN¥786m) (Based on the trailing twelve months to September 2024).

So, Guangdong Shenglu Telecommunication Tech has an ROCE of 2.0%. In absolute terms, that's a low return and it also under-performs the Communications industry average of 4.1%.

Above you can see how the current ROCE for Guangdong Shenglu Telecommunication Tech compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Guangdong Shenglu Telecommunication Tech .

So How Is Guangdong Shenglu Telecommunication Tech's ROCE Trending?

There is reason to be cautious about Guangdong Shenglu Telecommunication Tech, given the returns are trending downwards. To be more specific, the ROCE was 3.9% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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 Guangdong Shenglu Telecommunication Tech to turn into a multi-bagger.

The Key Takeaway

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. It should come as no surprise then that the stock has fallen 22% 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.

If you're still interested in Guangdong Shenglu Telecommunication Tech it's worth checking out our FREE intrinsic value approximation for 002446 to see if it's trading at an attractive price in other respects.

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.