Returns On Capital Signal Difficult Times Ahead For Shenzhen Fenda Technology (SZSE:002681)

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 the company is producing less profit from its investments and its total assets are decreasing. On that note, looking into Shenzhen Fenda Technology (SZSE:002681), we weren't too upbeat about how things were going.

Understanding 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. Analysts use this formula to calculate it for Shenzhen Fenda Technology:

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

0.041 = CN¥134m ÷ (CN¥4.5b - CN¥1.2b) (Based on the trailing twelve months to September 2023).

Thus, Shenzhen Fenda Technology has an ROCE of 4.1%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 8.3%.

Check out our latest analysis for Shenzhen Fenda Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shenzhen Fenda Technology's ROCE against it's prior returns. If you're interested in investigating Shenzhen Fenda Technology's past further, check out this free graph covering Shenzhen Fenda Technology's past earnings, revenue and cash flow.

So How Is Shenzhen Fenda Technology's ROCE Trending?

In terms of Shenzhen Fenda Technology's historical ROCE trend, it isn't fantastic. The company used to generate 6.6% on its capital five years ago but it has since fallen noticeably. On top of that, the business is utilizing 53% less capital within its operations. 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. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

The Key Takeaway

To see Shenzhen Fenda Technology reducing the capital employed in the business in tandem with diminishing returns, is concerning. Long term shareholders who've owned the stock over the last five years have experienced a 13% 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're still interested in Shenzhen Fenda Technology it's worth checking out our FREE intrinsic value approximation for 002681 to see if it's trading at an attractive price in other respects.

While Shenzhen Fenda Technology isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.