Be Wary Of Shenzhen Tianyuan DIC Information Technology (SZSE:300047) And Its Returns On Capital

What underlying fundamental trends can indicate that a company might be in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates the company is producing less profit from its investments and its total assets are decreasing. On that note, looking into Shenzhen Tianyuan DIC Information Technology (SZSE:300047), we weren't too upbeat about how things were going.

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 Shenzhen Tianyuan DIC Information Technology is:

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

0.043 = CN¥162m ÷ (CN¥7.1b - CN¥3.3b) (Based on the trailing twelve months to December 2023).

Therefore, Shenzhen Tianyuan DIC Information Technology has an ROCE of 4.3%. In absolute terms, that's a low return, but it's much better than the Software industry average of 3.0%.

Check out our latest analysis for Shenzhen Tianyuan DIC Information Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shenzhen Tianyuan DIC Information Technology's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Shenzhen Tianyuan DIC Information Technology.

What Does the ROCE Trend For Shenzhen Tianyuan DIC Information Technology Tell Us?

There is reason to be cautious about Shenzhen Tianyuan DIC Information Technology, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 8.8% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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 Shenzhen Tianyuan DIC Information Technology becoming one if things continue as they have.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 47%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 4.3%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

The Bottom Line On Shenzhen Tianyuan DIC Information Technology's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors haven't taken kindly to these developments, since the stock has declined 33% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Shenzhen Tianyuan DIC Information Technology does have some risks though, and we've spotted 2 warning signs for Shenzhen Tianyuan DIC Information Technology that you might be interested in.

While Shenzhen Tianyuan DIC Information Technology 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.