JC Finance & Tax Interconnect Holdings (SZSE:002530) Will Be Hoping To Turn Its Returns On Capital Around

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount 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 glancing at the trends within JC Finance & Tax Interconnect Holdings (SZSE:002530), we weren't too hopeful.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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).

Thus, JC Finance & Tax Interconnect Holdings has an ROCE of 0.8%. Ultimately, that's a low return and it under-performs the Machinery industry average of 5.2%.

View our latest analysis for JC Finance & Tax Interconnect Holdings

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating JC Finance & Tax Interconnect Holdings' past further, check out this free graph covering JC Finance & Tax Interconnect Holdings' past earnings, revenue and cash flow.

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

We are a bit anxious about the trends of ROCE at JC Finance & Tax Interconnect Holdings. To be more specific, today's ROCE was 6.5% five years ago but has since fallen to 0.8%. What's equally concerning is that the amount of capital deployed in the business has shrunk by 65% over that same period. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.

On a side note, JC Finance & Tax Interconnect Holdings' current liabilities have increased over the last five years to 38% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 0.8%. 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.

The Bottom Line

To see JC Finance & Tax Interconnect Holdings reducing the capital employed in the business in tandem with diminishing returns, is concerning. In spite of that, the stock has delivered a 13% 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.

Like most companies, JC Finance & Tax Interconnect Holdings does come with some risks, and we've found 1 warning sign that you should be aware of.

While JC Finance & Tax Interconnect Holdings 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.