Investors Could Be Concerned With JC Finance & Tax Interconnect Holdings' (SZSE:002530) Returns On Capital

When researching a stock for investment, what can tell us that the company is in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after we looked into JC Finance & Tax Interconnect Holdings (SZSE:002530), the trends above didn't look too great.

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 JC Finance & Tax Interconnect Holdings, this is the formula:

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

0.0085 = CN¥14m ÷ (CN¥2.6b - CN¥969m) (Based on the trailing twelve months to September 2024).

So, JC Finance & Tax Interconnect Holdings has an ROCE of 0.8%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.3%.

View our latest analysis for JC Finance & Tax Interconnect Holdings

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

So How Is JC Finance & Tax Interconnect Holdings' ROCE Trending?

The trend of returns that JC Finance & Tax Interconnect Holdings is generating are raising some concerns. To be more specific, today's ROCE was 6.5% five years ago but has since fallen to 0.8%. In addition to that, JC Finance & Tax Interconnect Holdings is now employing 65% less capital than it was five years ago. 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.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 38%, 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.

In Conclusion...

In summary, it's unfortunate that JC Finance & Tax Interconnect Holdings is shrinking its capital base and also generating lower returns. Despite the concerning underlying trends, the stock has actually gained 0.9% over the last five years, so it might be that the investors are expecting the trends to reverse. 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, we've spotted 1 warning sign facing JC Finance & Tax Interconnect Holdings that you might find interesting.

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.