The Returns On Capital At Beijing Jetsen Technology (SZSE:300182) Don't Inspire Confidence

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. So after we looked into Beijing Jetsen Technology (SZSE:300182), the trends above didn't look too great.

What Is 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. To calculate this metric for Beijing Jetsen Technology, this is the formula:

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

0.065 = CN¥526m ÷ (CN¥11b - CN¥2.7b) (Based on the trailing twelve months to September 2023).

Therefore, Beijing Jetsen Technology has an ROCE of 6.5%. In absolute terms, that's a low return, but it's much better than the Entertainment industry average of 3.8%.

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're interested, you can view the analysts predictions in our free analyst report for Beijing Jetsen Technology .

What Can We Tell From Beijing Jetsen Technology's ROCE Trend?

The trend of ROCE at Beijing Jetsen Technology is showing some signs of weakness. To be more specific, today's ROCE was 12% five years ago but has since fallen to 6.5%. What's equally concerning is that the amount of capital deployed in the business has shrunk by 33% over that same period. 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.

Our Take On Beijing Jetsen Technology's ROCE

In summary, it's unfortunate that Beijing Jetsen Technology is shrinking its capital base and also generating lower returns. Investors haven't taken kindly to these developments, since the stock has declined 20% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

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

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.