Returns On Capital At Shenzhen Tianyuan DIC Information Technology (SZSE:300047) Paint A Concerning Picture

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after we looked into Shenzhen Tianyuan DIC Information Technology (SZSE:300047), the trends above didn't look too great.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Shenzhen Tianyuan DIC Information Technology, this is the formula:

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

0.046 = CN¥178m ÷ (CN¥6.4b - CN¥2.6b) (Based on the trailing twelve months to September 2024).

Thus, Shenzhen Tianyuan DIC Information Technology has an ROCE of 4.6%. On its own that's a low return, but compared to the average of 2.3% generated by the Software industry, it's much better.

View 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're interested in investigating Shenzhen Tianyuan DIC Information Technology's past further, check out this free graph covering Shenzhen Tianyuan DIC Information Technology's past earnings, revenue and cash flow.

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

In terms of Shenzhen Tianyuan DIC Information Technology's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 9.6%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Shenzhen Tianyuan DIC Information Technology to turn into a multi-bagger.

Another thing to note, Shenzhen Tianyuan DIC Information Technology has a high ratio of current liabilities to total assets of 41%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. However the stock has delivered a 91% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

One final note, you should learn about the 3 warning signs we've spotted with Shenzhen Tianyuan DIC Information Technology (including 2 which are potentially serious) .

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.