What financial metrics can indicate to us that a company is maturing or even in decline? 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. So after glancing at the trends within Hangzhou Shunwang Technology CoLtd (SZSE:300113), we weren't too hopeful.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for Hangzhou Shunwang Technology CoLtd, this is the formula:

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 5.0% generated by the Entertainment industry, it's much better.

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 analyst report for Hangzhou Shunwang Technology CoLtd .

What Does the ROCE Trend For Hangzhou Shunwang Technology CoLtd Tell Us?

In terms of Hangzhou Shunwang Technology CoLtd's historical ROCE trend, it isn't fantastic. Unfortunately, returns have declined substantially over the last five years to the 6.8% we see today. What's equally concerning is that the amount of capital deployed in the business has shrunk by 40% over that same period. 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.

Our Take On 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. It should come as no surprise then that the stock has fallen 48% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing to note, we've identified 1 warning sign with Hangzhou Shunwang Technology CoLtd and understanding it 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.