When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. Having said that, after a brief look, Genimous Technology (SZSE:000676) we aren't filled with optimism, but let's investigate further.
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 Genimous Technology, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.025 = CN¥94m ÷ (CN¥4.7b - CN¥922m) (Based on the trailing twelve months to September 2023).
Thus, Genimous Technology has an ROCE of 2.5%. In absolute terms, that's a low return but it's around the Software industry average of 2.6%.
See our latest analysis for Genimous Technology
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 of past earnings, revenue and cash flow.
The Trend Of ROCE
We are a bit anxious about the trends of ROCE at Genimous Technology. To be more specific, today's ROCE was 14% five years ago but has since fallen to 2.5%. On top of that, the business is utilizing 34% less capital within its operations. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. If these underlying trends continue, we wouldn't be too optimistic going forward.
The Key Takeaway
To see Genimous Technology reducing the capital employed in the business in tandem with diminishing returns, is concerning. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.
One more thing to note, we've identified 2 warning signs with Genimous Technology and understanding them should be part of your investment process.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.