INESA Intelligent Tech's (SHSE:600602) Returns On Capital Not Reflecting Well On The Business

When researching a stock for investment, what can tell us that the company is in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. In light of that, from a first glance at INESA Intelligent Tech (SHSE:600602), we've spotted some signs that it could be struggling, so let's investigate.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for INESA Intelligent Tech:

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

0.013 = CN¥64m ÷ (CN¥6.9b - CN¥2.0b) (Based on the trailing twelve months to March 2024).

Thus, INESA Intelligent Tech has an ROCE of 1.3%. In absolute terms, that's a low return and it also under-performs the IT industry average of 3.9%.

View 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.

How Are Returns Trending?

There is reason to be cautious about INESA Intelligent Tech, given the returns are trending downwards. About five years ago, returns on capital were 1.8%, however they're now substantially lower than that as we saw above. 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. If these trends continue, we wouldn't expect INESA Intelligent Tech to turn into a multi-bagger.

The Key Takeaway

In summary, it's unfortunate that INESA Intelligent Tech is generating lower returns from the same amount of capital. Yet despite these concerning fundamentals, the stock has performed strongly with a 52% return over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you're still interested in INESA Intelligent Tech it's worth checking out our FREE intrinsic value approximation for 600602 to see if it's trading at an attractive price in other respects.

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.

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