Returns On Capital Signal Difficult Times Ahead For NanJi E-Commerce (SZSE:002127)

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. On that note, looking into NanJi E-Commerce (SZSE:002127), we weren't too upbeat about how things were going.

Understanding 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. Analysts use this formula to calculate it for NanJi E-Commerce:

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

0.0012 = CN¥5.4m ÷ (CN¥5.2b - CN¥736m) (Based on the trailing twelve months to September 2024).

Thus, NanJi E-Commerce has an ROCE of 0.1%. Ultimately, that's a low return and it under-performs the Media industry average of 5.2%.

View our latest analysis for NanJi E-Commerce

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 NanJi E-Commerce has performed in the past in other metrics, you can view this free graph of NanJi E-Commerce's past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of NanJi E-Commerce's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 24%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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 NanJi E-Commerce to turn into a multi-bagger.

The Bottom Line On NanJi E-Commerce's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. It should come as no surprise then that the stock has fallen 55% 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'd like to know more about NanJi E-Commerce, we've spotted 4 warning signs, and 3 of them shouldn't be ignored.

While NanJi E-Commerce 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.