Qingdao Eastsoft Communication TechnologyLtd (SZSE:300183) May Have Issues Allocating Its Capital

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? 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 reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after glancing at the trends within Qingdao Eastsoft Communication TechnologyLtd (SZSE:300183), we weren't too hopeful.

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 Qingdao Eastsoft Communication TechnologyLtd, this is the formula:

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

0.018 = CN¥56m ÷ (CN¥3.6b - CN¥377m) (Based on the trailing twelve months to September 2024).

Thus, Qingdao Eastsoft Communication TechnologyLtd has an ROCE of 1.8%. In absolute terms, that's a low return and it also under-performs the Communications industry average of 4.1%.

View our latest analysis for Qingdao Eastsoft Communication TechnologyLtd

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

So How Is Qingdao Eastsoft Communication TechnologyLtd's ROCE Trending?

In terms of Qingdao Eastsoft Communication TechnologyLtd's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 4.3%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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

In summary, it's unfortunate that Qingdao Eastsoft Communication TechnologyLtd is generating lower returns from the same amount of capital. In spite of that, the stock has delivered a 10% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

One more thing: We've identified 3 warning signs with Qingdao Eastsoft Communication TechnologyLtd (at least 1 which doesn't sit too well with us) , and understanding these would certainly be useful.

While Qingdao Eastsoft Communication TechnologyLtd 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.