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. 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. So after we looked into Shenzhen Ysstech Info-TechLtd (SZSE:300377), the trends above didn't look too great.

Understanding 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. Analysts use this formula to calculate it for Shenzhen Ysstech Info-TechLtd:

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

0.023 = CN¥69m ÷ (CN¥3.3b - CN¥317m) (Based on the trailing twelve months to September 2023).

Therefore, Shenzhen Ysstech Info-TechLtd has an ROCE of 2.3%. On its own, that's a low figure but it's around the 2.7% average generated by the Software industry.

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Shenzhen Ysstech Info-TechLtd.

The Trend Of ROCE

We are a bit worried about the trend of returns on capital at Shenzhen Ysstech Info-TechLtd. Unfortunately the returns on capital have diminished from the 8.9% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Shenzhen Ysstech Info-TechLtd to turn into a multi-bagger.

What We Can Learn From Shenzhen Ysstech Info-TechLtd's ROCE

In summary, it's unfortunate that Shenzhen Ysstech Info-TechLtd is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last five years have experienced a 53% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Shenzhen Ysstech Info-TechLtd (of which 2 are potentially serious!) that you should know about.

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.