If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. Having said that, after a brief look, Shenzhen Jieshun Science and Technology IndustryLtd (SZSE:002609) we aren't filled with optimism, but let's investigate further.

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. To calculate this metric for Shenzhen Jieshun Science and Technology IndustryLtd, this is the formula:

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%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 5.4%.

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'd like, you can check out the forecasts from the analysts covering Shenzhen Jieshun Science and Technology IndustryLtd for free.

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

There is reason to be cautious about Shenzhen Jieshun Science and Technology IndustryLtd, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 3.7% 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. 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 Jieshun Science and Technology IndustryLtd to turn into a multi-bagger.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 26%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

Our Take On 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. In spite of that, the stock has delivered a 5.1% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

One more thing to note, we've identified 1 warning sign with Shenzhen Jieshun Science and Technology IndustryLtd and understanding it should be part of your investment process.

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.