When researching a stock for investment, what can tell us that the company is in decline? 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. Basically the company is earning less on its investments and it is also reducing its total assets. So after we looked into Genimous Technology (SZSE:000676), the trends above didn't look too great.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Genimous Technology:

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

0.014 = CN¥57m ÷ (CN¥4.8b - CN¥724m) (Based on the trailing twelve months to September 2024).

Thus, Genimous Technology has an ROCE of 1.4%. In absolute terms, that's a low return and it also under-performs the Software industry average of 2.3%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Genimous Technology's ROCE against it's prior returns. If you're interested in investigating Genimous Technology's past further, check out this free graph covering Genimous Technology's past earnings, revenue and cash flow.

The Trend Of ROCE

The trend of returns that Genimous Technology is generating are raising some concerns. To be more specific, today's ROCE was 7.7% five years ago but has since fallen to 1.4%. On top of that, the business is utilizing 37% less capital within its operations. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. If these underlying trends continue, we wouldn't be too optimistic going forward.

On a related note, Genimous Technology has decreased its current liabilities to 15% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On Genimous Technology's ROCE

In summary, it's unfortunate that Genimous Technology is shrinking its capital base and also generating lower returns. Despite the concerning underlying trends, the stock has actually gained 12% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you want to continue researching Genimous Technology, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Genimous Technology 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.