When we research a stock for investment, what can tell us the company is in decline? More often than not we will see a decline yield on invested capital (ROCE) and a downward trend quantity of the invested capital. This indicates to us that not only is the company shrinking the size of its net assets, but its returns are also falling. In light of that, from a first glance at INESA Intelligent technology (SHSE:600602), we’ve seen some signs that there may be problems, so let’s investigate.

What is return on capital employed (ROCE)?

If you’re new to ROCE, it measures the ‘return’ (pre-tax profit) that a company generates from the capital invested in its operations. Analysts use this formula to calculate it for INESA Intelligent Tech:

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

0.013 = CN¥64m ÷ (CN¥6.9b – CN¥2.0b) (Based on the last twelve months to March 2024).

So, INESA Intelligent Tech has a ROCE of 1.3%. In absolute terms, that’s a low return and it also performs below the IT industry average of 3.9%.

Check out our latest analysis for INESA Intelligent Tech

In the chart above, we compared INESA Intelligent Tech’s prior ROCE against its past performance, but the future is arguably more important. If you want, you can check out the predictions from the analysts at INESA Intelligent Tech free.

How are returns trending?

There is reason to be cautious about INESA Intelligent Tech as returns are trending downward. About five years ago the return on capital was 1.8%, but now it is significantly lower than what we saw above. Meanwhile, capital invested in the company has remained roughly the same over the period. Because yields are falling and the company is using the same amount of assets, this could indicate that it is a mature company that has not seen much growth over the past five years. If these trends continue, we don’t expect INESA Intelligent Tech to become a multi-bagger.

The most important takeaway

In summary, it is a shame that INESA Intelligent Tech generates lower returns with the same amount of capital. But despite these fundamentals, the stock has performed strongly over the past five years with a 52% return, so investors seem very bullish. Either way, we’re not too comfortable with the fundamentals, so we’d avoid this stock for now.

If you’re still interested in INESA Intelligent Tech, it’s worth checking out our FREE approximation of the net asset value for 600602 to see if it trades at an attractive price in other respects.

For those who like to invest solid companies, take a look at this free list of companies with solid balance sheets and high returns on equity.

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. We aim to provide you with targeted, long-term analysis based on fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Simply Wall St has no positions in the stocks mentioned.

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