INESA Intelligent Tech (SHSE:600602) Will Be Looking To Turn Around Its Returns

What underlying fundamental trends can indicate that a company might be in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. On that note, looking into INESA Intelligent Tech (SHSE:600602), we weren't too upbeat about how things were going.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on INESA Intelligent Tech is:

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

0.013 = CN¥62m ÷ (CN¥6.6b - CN¥1.7b) (Based on the trailing twelve months to June 2024).

Therefore, INESA Intelligent Tech has an ROCE of 1.3%. Ultimately, that's a low return and it under-performs the IT industry average of 3.8%.

See our latest analysis for INESA Intelligent Tech

In the above chart we have measured INESA Intelligent Tech's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering INESA Intelligent Tech for free.

The Trend Of ROCE

In terms of INESA Intelligent Tech's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 1.6% that they were earning five years ago. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on INESA Intelligent Tech becoming one if things continue as they have.

In Conclusion...

In summary, it's unfortunate that INESA Intelligent Tech is generating lower returns from the same amount of capital. However the stock has delivered a 81% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a final note, we've found 1 warning sign for INESA Intelligent Tech that we think you should be aware of.

While INESA Intelligent Tech 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.