Some Investors May Be Worried About Suzhou Gold Mantis Construction Decoration's (SZSE:002081) Returns On Capital

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after we looked into Suzhou Gold Mantis Construction Decoration (SZSE:002081), the trends above didn't look too great.

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 Suzhou Gold Mantis Construction Decoration:

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

0.065 = CN¥944m ÷ (CN¥35b - CN¥21b) (Based on the trailing twelve months to September 2024).

Therefore, Suzhou Gold Mantis Construction Decoration has an ROCE of 6.5%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.1%.

View our latest analysis for Suzhou Gold Mantis Construction Decoration

In the above chart we have measured Suzhou Gold Mantis Construction Decoration'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 Suzhou Gold Mantis Construction Decoration .

What The Trend Of ROCE Can Tell Us

In terms of Suzhou Gold Mantis Construction Decoration's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 17% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Suzhou Gold Mantis Construction Decoration to turn into a multi-bagger.

On a separate but related note, it's important to know that Suzhou Gold Mantis Construction Decoration has a current liabilities to total assets ratio of 58%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Suzhou Gold Mantis Construction Decoration'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. Long term shareholders who've owned the stock over the last five years have experienced a 50% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you want to know some of the risks facing Suzhou Gold Mantis Construction Decoration we've found 2 warning signs (1 is potentially serious!) that you should be aware of before investing here.

While Suzhou Gold Mantis Construction Decoration 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.