The Returns On Capital At Leon Technology (SZSE:300603) Don't Inspire Confidence

What financial metrics can indicate to us that a company is maturing or even 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 indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. And from a first read, things don't look too good at Leon Technology (SZSE:300603), so let's see why.

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. Analysts use this formula to calculate it for Leon Technology:

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

0.024 = CN¥36m ÷ (CN¥2.2b - CN¥728m) (Based on the trailing twelve months to September 2024).

So, Leon Technology has an ROCE of 2.4%. In absolute terms, that's a low return and it also under-performs the IT industry average of 3.7%.

See our latest analysis for Leon Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Leon 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 Leon Technology.

So How Is Leon Technology's ROCE Trending?

The trend of returns that Leon Technology is generating are raising some concerns. Unfortunately, returns have declined substantially over the last five years to the 2.4% we see today. What's equally concerning is that the amount of capital deployed in the business has shrunk by 40% over that same period. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. If these underlying trends continue, we wouldn't be too optimistic going forward.

In Conclusion...

In summary, it's unfortunate that Leon Technology is shrinking its capital base and also generating lower returns. Investors haven't taken kindly to these developments, since the stock has declined 54% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a final note, we've found 2 warning signs for Leon Technology that we think you should be aware of.

While Leon Technology may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.