To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after we looked into Shenzhen Jieshun Science and Technology IndustryLtd (SZSE:002609), the trends above didn't look too great.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Shenzhen Jieshun Science and Technology IndustryLtd:

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

0.022 = CN¥62m ÷ (CN¥3.8b - CN¥1.0b) (Based on the trailing twelve months to September 2023).

Thus, Shenzhen Jieshun Science and Technology IndustryLtd has an ROCE of 2.2%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.0%.

View our latest analysis for Shenzhen Jieshun Science and Technology IndustryLtd

In the above chart we have measured Shenzhen Jieshun Science and Technology IndustryLtd's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Shenzhen Jieshun Science and Technology IndustryLtd Tell Us?

We are a bit worried about the trend of returns on capital at Shenzhen Jieshun Science and Technology IndustryLtd. Unfortunately the returns on capital have diminished from the 3.7% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Shenzhen Jieshun Science and Technology IndustryLtd becoming one if things continue as they have.

On a side note, Shenzhen Jieshun Science and Technology IndustryLtd's current liabilities have increased over the last five years to 26% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

What We Can Learn From Shenzhen Jieshun Science and Technology IndustryLtd's ROCE

In summary, it's unfortunate that Shenzhen Jieshun Science and Technology IndustryLtd is generating lower returns from the same amount of capital. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 108%. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a final note, we've found 2 warning signs for Shenzhen Jieshun Science and Technology IndustryLtd that we think you should be aware of.

While Shenzhen Jieshun Science and Technology IndustryLtd 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.