Jouder Precision Industry (Kunshan)'s (SZSE:300549) Returns On Capital Tell Us There Is Reason To Feel Uneasy

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? 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. Having said that, after a brief look, Jouder Precision Industry (Kunshan) (SZSE:300549) we aren't filled with optimism, but let's investigate further.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Jouder Precision Industry (Kunshan), this is the formula:

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

0.013 = CN¥6.9m ÷ (CN¥688m - CN¥136m) (Based on the trailing twelve months to September 2024).

So, Jouder Precision Industry (Kunshan) has an ROCE of 1.3%. Ultimately, that's a low return and it under-performs the Machinery industry average of 5.2%.

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'd like to look at how Jouder Precision Industry (Kunshan) has performed in the past in other metrics, you can view this free graph of 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. Unfortunately the returns on capital have diminished from the 5.7% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Jouder Precision Industry (Kunshan) to turn into a multi-bagger.

Our Take On Jouder Precision Industry (Kunshan)'s ROCE

In summary, it's unfortunate that Jouder Precision Industry (Kunshan) is generating lower returns from the same amount of capital. However the stock has delivered a 65% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Jouder Precision Industry (Kunshan) does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.