When researching a stock for investment, what can tell us that the company is in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining 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 Huafon Microfibre (Shanghai) (SZSE:300180), we weren't too hopeful.
What Is 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. To calculate this metric for Huafon Microfibre (Shanghai), this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0026 = CN¥14m ÷ (CN¥7.1b - CN¥1.9b) (Based on the trailing twelve months to September 2024).
So, Huafon Microfibre (Shanghai) has an ROCE of 0.3%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 5.4%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Huafon Microfibre (Shanghai)'s ROCE against it's prior returns. If you'd like to look at how Huafon Microfibre (Shanghai) has performed in the past in other metrics, you can view this free graph of Huafon Microfibre (Shanghai)'s past earnings, revenue and cash flow.
So How Is Huafon Microfibre (Shanghai)'s ROCE Trending?
In terms of Huafon Microfibre (Shanghai)'s historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 4.7% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Huafon Microfibre (Shanghai) becoming one if things continue as they have.
What We Can Learn From Huafon Microfibre (Shanghai)'s ROCE
In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Long term shareholders who've owned the stock over the last five years have experienced a 13% 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.
Huafon Microfibre (Shanghai) does have some risks though, and we've spotted 2 warning signs for Huafon Microfibre (Shanghai) that you might be interested in.
While Huafon Microfibre (Shanghai) 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.
