Jouder Precision Industry (Kunshan) (SZSE:300549) Is Finding It Tricky To Allocate Its Capital

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? 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 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 Jouder Precision Industry (Kunshan) (SZSE:300549), the trends above didn't look too great.

What Is 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. The formula for this calculation on Jouder Precision Industry (Kunshan) is:

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

0.0084 = CN¥4.6m ÷ (CN¥655m - CN¥111m) (Based on the trailing twelve months to June 2024).

So, Jouder Precision Industry (Kunshan) has an ROCE of 0.8%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.5%.

See our latest analysis for Jouder Precision Industry (Kunshan)

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 Jouder Precision Industry (Kunshan)'s past further, check out this free graph covering Jouder Precision Industry (Kunshan)'s past earnings, revenue and cash flow.

What Can We Tell From Jouder Precision Industry (Kunshan)'s ROCE Trend?

There is reason to be cautious about Jouder Precision Industry (Kunshan), given the returns are trending downwards. About five years ago, returns on capital were 7.3%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Jouder Precision Industry (Kunshan) becoming one if things continue as they have.

On a related note, Jouder Precision Industry (Kunshan) has decreased its current liabilities to 17% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

In summary, it's unfortunate that Jouder Precision Industry (Kunshan) is generating lower returns from the same amount of capital. Despite the concerning underlying trends, the stock has actually gained 4.0% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

If you want to know some of the risks facing Jouder Precision Industry (Kunshan) we've found 5 warning signs (2 are a bit concerning!) that you should be aware of before investing here.

While Jouder Precision Industry (Kunshan) 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.