Returns On Capital At Shanghai Jahwa United (SHSE:600315) Paint A Concerning Picture

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after we looked into Shanghai Jahwa United (SHSE:600315), the trends above didn't look too great.

What Is 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. Analysts use this formula to calculate it for Shanghai Jahwa United:

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

0.03 = CN¥253m ÷ (CN¥11b - CN¥2.9b) (Based on the trailing twelve months to September 2024).

Thus, Shanghai Jahwa United has an ROCE of 3.0%. Ultimately, that's a low return and it under-performs the Personal Products industry average of 6.6%.

Check out our latest analysis for Shanghai Jahwa United

In the above chart we have measured Shanghai Jahwa United's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Shanghai Jahwa United .

What Can We Tell From Shanghai Jahwa United's ROCE Trend?

We are a bit worried about the trend of returns on capital at Shanghai Jahwa United. About five years ago, returns on capital were 4.0%, 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. If these trends continue, we wouldn't expect Shanghai Jahwa United to turn into a multi-bagger.

The Bottom Line On Shanghai Jahwa United's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. It should come as no surprise then that the stock has fallen 41% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you want to continue researching Shanghai Jahwa United, you might be interested to know about the 3 warning signs that our analysis has discovered.

While Shanghai Jahwa United 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.