Be Wary Of Qingdao Eastsoft Communication TechnologyLtd (SZSE:300183) And Its Returns On Capital

When researching a stock for investment, what can tell us that the company is 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. Basically the company is earning less on its investments and it is also reducing its total assets. On that note, looking into Qingdao Eastsoft Communication TechnologyLtd (SZSE:300183), we weren't too upbeat about how things were going.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Qingdao Eastsoft Communication TechnologyLtd:

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

0.0094 = CN¥30m ÷ (CN¥3.5b - CN¥310m) (Based on the trailing twelve months to March 2024).

So, Qingdao Eastsoft Communication TechnologyLtd has an ROCE of 0.9%. In absolute terms, that's a low return and it also under-performs the Communications industry average of 3.9%.

View our latest analysis for Qingdao Eastsoft Communication TechnologyLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Qingdao Eastsoft Communication TechnologyLtd's past further, check out this free graph covering Qingdao Eastsoft Communication TechnologyLtd's past earnings, revenue and cash flow.

What Can We Tell From Qingdao Eastsoft Communication TechnologyLtd's ROCE Trend?

In terms of Qingdao Eastsoft Communication TechnologyLtd's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 4.6% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Qingdao Eastsoft Communication TechnologyLtd becoming one if things continue as they have.

The Bottom Line

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 21% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Qingdao Eastsoft Communication TechnologyLtd does have some risks, we noticed 3 warning signs (and 1 which can't be ignored) we think you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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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