Beijing Join-Cheer Software (SZSE:002279) Has Some Difficulty Using Its Capital Effectively

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing 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 Beijing Join-Cheer Software (SZSE:002279), we've spotted some signs that it could be struggling, so let's investigate.

What Is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Beijing Join-Cheer Software:

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

0.016 = CN¥28m ÷ (CN¥2.6b - CN¥780m) (Based on the trailing twelve months to September 2023).

So, Beijing Join-Cheer Software has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Software industry average of 2.7%.

See our latest analysis for Beijing Join-Cheer Software

Historical performance is a great place to start when researching a stock so above you can see the gauge for Beijing Join-Cheer Software's ROCE against it's prior returns. If you'd like to look at how Beijing Join-Cheer Software has performed in the past in other metrics, you can view this free graph of Beijing Join-Cheer Software's past earnings, revenue and cash flow.

What Does the ROCE Trend For Beijing Join-Cheer Software Tell Us?

The trend of ROCE at Beijing Join-Cheer Software is showing some signs of weakness. Unfortunately, returns have declined substantially over the last five years to the 1.6% we see today. In addition to that, Beijing Join-Cheer Software is now employing 42% less capital than it was five years ago. 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.

In Conclusion...

To see Beijing Join-Cheer Software reducing the capital employed in the business in tandem with diminishing returns, is concerning. Investors haven't taken kindly to these developments, since the stock has declined 37% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you want to continue researching Beijing Join-Cheer Software, you might be interested to know about the 1 warning sign that our analysis has discovered.

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.