Shanghai Tongji Science&Technology IndustrialLtd (SHSE:600846) Will Be Hoping To Turn Its Returns On Capital Around

What financial metrics can indicate to us that a company is maturing or even in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. On that note, looking into Shanghai Tongji Science&Technology IndustrialLtd (SHSE:600846), we weren't too upbeat about how things were going.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Shanghai Tongji Science&Technology IndustrialLtd:

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

0.043 = CN¥189m ÷ (CN¥11b - CN¥6.8b) (Based on the trailing twelve months to June 2024).

Thus, Shanghai Tongji Science&Technology IndustrialLtd has an ROCE of 4.3%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 5.7%.

View our latest analysis for Shanghai Tongji Science&Technology IndustrialLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shanghai Tongji Science&Technology IndustrialLtd's ROCE against it's prior returns. If you're interested in investigating Shanghai Tongji Science&Technology IndustrialLtd's past further, check out this free graph covering Shanghai Tongji Science&Technology IndustrialLtd's past earnings, revenue and cash flow.

What Does the ROCE Trend For Shanghai Tongji Science&Technology IndustrialLtd Tell Us?

There is reason to be cautious about Shanghai Tongji Science&Technology IndustrialLtd, given the returns are trending downwards. About five years ago, returns on capital were 8.2%, 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. If these trends continue, we wouldn't expect Shanghai Tongji Science&Technology IndustrialLtd to turn into a multi-bagger.

On a separate but related note, it's important to know that Shanghai Tongji Science&Technology IndustrialLtd has a current liabilities to total assets ratio of 61%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Shanghai Tongji Science&Technology IndustrialLtd'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. In spite of that, the stock has delivered a 15% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with Shanghai Tongji Science&Technology IndustrialLtd (including 2 which don't sit too well with us) .

While Shanghai Tongji Science&Technology IndustrialLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.