If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. In light of that, from a first glance at Qingdao Eastsoft Communication TechnologyLtd (SZSE:300183), we've spotted some signs that it could be struggling, so let's investigate.
Return On Capital Employed (ROCE): What Is It?
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. The formula for this calculation on Qingdao Eastsoft Communication TechnologyLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.031 = CN¥97m ÷ (CN¥3.5b - CN¥305m) (Based on the trailing twelve months to June 2023).
So, Qingdao Eastsoft Communication TechnologyLtd has an ROCE of 3.1%. Ultimately, that's a low return and it under-performs the Communications industry average of 5.4%.
View our latest analysis for Qingdao Eastsoft Communication TechnologyLtd
Historical performance is a great place to start when researching a stock so above you can see the gauge for Qingdao Eastsoft Communication TechnologyLtd's ROCE against it's prior returns. If you're interested in investigating Qingdao Eastsoft Communication TechnologyLtd's past further, check out this free graph of past earnings, revenue and cash flow.
What Can We Tell From Qingdao Eastsoft Communication TechnologyLtd's ROCE Trend?
There is reason to be cautious about Qingdao Eastsoft Communication TechnologyLtd, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 5.1% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Qingdao Eastsoft Communication TechnologyLtd becoming one if things continue as they have.
Our Take On Qingdao Eastsoft Communication TechnologyLtd's ROCE
In summary, it's unfortunate that Qingdao Eastsoft Communication TechnologyLtd is generating lower returns from the same amount of capital. Yet despite these concerning fundamentals, the stock has performed strongly with a 47% return over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.
Qingdao Eastsoft Communication TechnologyLtd does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those are a bit concerning...
While Qingdao Eastsoft Communication TechnologyLtd 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.