What financial metrics can indicate to us that a company is maturing or even in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after glancing at the trends within Harbin Hatou InvestmentLtd (SHSE:600864), we weren't too hopeful.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Harbin Hatou InvestmentLtd, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0092 = CN¥165m ÷ (CN¥35b - CN¥17b) (Based on the trailing twelve months to September 2023).
Thus, Harbin Hatou InvestmentLtd has an ROCE of 0.9%. In absolute terms, that's a low return and it also under-performs the Water Utilities industry average of 7.1%.
View our latest analysis for Harbin Hatou InvestmentLtd
Historical performance is a great place to start when researching a stock so above you can see the gauge for Harbin Hatou InvestmentLtd's ROCE against it's prior returns. If you'd like to look at how Harbin Hatou InvestmentLtd has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
The trend of returns that Harbin Hatou InvestmentLtd is generating are raising some concerns. Unfortunately, returns have declined substantially over the last five years to the 0.9% we see today. On top of that, the business is utilizing 21% 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. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.
On a separate but related note, it's important to know that Harbin Hatou InvestmentLtd has a current liabilities to total assets ratio of 48%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Bottom Line On Harbin Hatou InvestmentLtd's ROCE
In summary, it's unfortunate that Harbin Hatou InvestmentLtd is shrinking its capital base and also generating lower returns. Investors must expect better things on the horizon though because the stock has risen 36% in 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.
On a separate note, we've found 1 warning sign for Harbin Hatou InvestmentLtd you'll probably want to know about.
While Harbin Hatou InvestmentLtd 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
