Beijing Jetsen Technology (SZSE:300182) Could Be Struggling To Allocate Capital

When researching a stock for investment, what can tell us that the company is in decline? 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 reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after glancing at the trends within Beijing Jetsen Technology (SZSE:300182), we weren't too hopeful.

What Is 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. The formula for this calculation on Beijing Jetsen Technology is:

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

0.06 = CN¥486m ÷ (CN¥11b - CN¥2.7b) (Based on the trailing twelve months to March 2024).

Thus, Beijing Jetsen Technology has an ROCE of 6.0%. In absolute terms, that's a low return but it's around the Entertainment industry average of 5.4%.

Check out our latest analysis for Beijing Jetsen Technology

In the above chart we have measured Beijing Jetsen Technology'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 Beijing Jetsen Technology .

What Does the ROCE Trend For Beijing Jetsen Technology Tell Us?

The trend of returns that Beijing Jetsen Technology is generating are raising some concerns. The company used to generate 9.5% on its capital five years ago but it has since fallen noticeably. On top of that, the business is utilizing 27% 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 Bottom Line On Beijing Jetsen Technology's ROCE

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. It should come as no surprise then that the stock has fallen 16% 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 Beijing Jetsen Technology you'll probably want to know about.

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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.

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