Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. And from a first read, things don't look too good at Hangzhou Shunwang Technology CoLtd (SZSE:300113), so let's see why.

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

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 Hangzhou Shunwang Technology CoLtd:

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

0.068 = CN¥140m ÷ (CN¥2.4b - CN¥340m) (Based on the trailing twelve months to September 2023).

Therefore, Hangzhou Shunwang Technology CoLtd has an ROCE of 6.8%. On its own that's a low return, but compared to the average of 3.8% generated by the Entertainment industry, it's much better.

See our latest analysis for Hangzhou Shunwang Technology CoLtd

In the above chart we have measured Hangzhou Shunwang Technology CoLtd'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 Hangzhou Shunwang Technology CoLtd Tell Us?

The trend of ROCE at Hangzhou Shunwang Technology CoLtd is showing some signs of weakness. To be more specific, today's ROCE was 21% five years ago but has since fallen to 6.8%. In addition to that, Hangzhou Shunwang Technology CoLtd is now employing 40% less capital than it was five years ago. 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. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

What We Can Learn From Hangzhou Shunwang Technology CoLtd's ROCE

To see Hangzhou Shunwang Technology CoLtd reducing the capital employed in the business in tandem with diminishing returns, is concerning. In spite of that, the stock has delivered a 12% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

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

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.