Investors Could Be Concerned With Hangzhou Shunwang Technology CoLtd's (SZSE:300113) Returns On Capital

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. 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. Basically the company is earning less on its investments and it is also reducing its total assets. So after we looked into Hangzhou Shunwang Technology CoLtd (SZSE:300113), the trends above didn't look too great.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for Hangzhou Shunwang Technology CoLtd, this is the formula:

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

0.086 = CN¥195m ÷ (CN¥2.7b - CN¥407m) (Based on the trailing twelve months to March 2024).

Thus, Hangzhou Shunwang Technology CoLtd has an ROCE of 8.6%. In absolute terms, that's a low return, but it's much better than the Entertainment industry average of 5.2%.

View our latest analysis for Hangzhou Shunwang Technology CoLtd

Above you can see how the current ROCE for Hangzhou Shunwang Technology CoLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Hangzhou Shunwang Technology CoLtd .

What Can We Tell From Hangzhou Shunwang Technology CoLtd's ROCE Trend?

We are a bit anxious about the trends of ROCE at Hangzhou Shunwang Technology CoLtd. Unfortunately, returns have declined substantially over the last five years to the 8.6% we see today. On top of that, the business is utilizing 30% 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. If these underlying trends continue, we wouldn't be too optimistic going forward.

The Key Takeaway

To see Hangzhou Shunwang Technology CoLtd reducing the capital employed in the business in tandem with diminishing returns, is concerning. It should come as no surprise then that the stock has fallen 22% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a separate note, we've found 1 warning sign for Hangzhou Shunwang Technology CoLtd you'll probably want to know about.

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.