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 the company is producing less profit from its investments and its total assets are decreasing. Having said that, after a brief look, Henan Huaying Agricultural Development (SZSE:002321) we aren't filled with optimism, but let's investigate further.

Understanding Return On Capital Employed (ROCE)

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 Henan Huaying Agricultural Development:

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

0.07 = CN¥176m ÷ (CN¥4.1b - CN¥1.6b) (Based on the trailing twelve months to September 2023).

So, Henan Huaying Agricultural Development has an ROCE of 7.0%. On its own, that's a low figure but it's around the 7.5% average generated by the Food industry.

Check out our latest analysis for Henan Huaying Agricultural Development

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 Henan Huaying Agricultural Development's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Henan Huaying Agricultural Development's ROCE Trend?

In terms of Henan Huaying Agricultural Development's historical ROCE trend, it isn't fantastic. Unfortunately, returns have declined substantially over the last five years to the 7.0% we see today. On top of that, the business is utilizing 34% less capital within its operations. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. If these underlying trends continue, we wouldn't be too optimistic going forward.

On a side note, Henan Huaying Agricultural Development has done well to pay down its current liabilities to 38% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Key Takeaway

In summary, it's unfortunate that Henan Huaying Agricultural Development is shrinking its capital base and also generating lower returns. Long term shareholders who've owned the stock over the last five years have experienced a 64% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Like most companies, Henan Huaying Agricultural Development does come with some risks, and we've found 1 warning sign that you should be aware of.

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.