If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Basically the company is earning less on its investments and it is also reducing its total assets. And from a first read, things don't look too good at Shenzhen Kaizhong Precision Technology (SZSE:002823), so let's see why.

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. Analysts use this formula to calculate it for Shenzhen Kaizhong Precision Technology:

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

0.031 = CN¥74m ÷ (CN¥3.8b - CN¥1.4b) (Based on the trailing twelve months to September 2023).

Therefore, Shenzhen Kaizhong Precision Technology has an ROCE of 3.1%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 6.6%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shenzhen Kaizhong Precision Technology's ROCE against it's prior returns. If you'd like to look at how Shenzhen Kaizhong Precision Technology has performed in the past in other metrics, you can view this free graph of Shenzhen Kaizhong Precision Technology's past earnings, revenue and cash flow.

So How Is Shenzhen Kaizhong Precision Technology's ROCE Trending?

We are a bit worried about the trend of returns on capital at Shenzhen Kaizhong Precision Technology. About five years ago, returns on capital were 9.4%, however they're now substantially lower than that as we saw above. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Shenzhen Kaizhong Precision Technology becoming one if things continue as they have.

What We Can Learn From Shenzhen Kaizhong Precision Technology's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Investors haven't taken kindly to these developments, since the stock has declined 19% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with Shenzhen Kaizhong Precision Technology (including 2 which shouldn't be ignored) .

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.