Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates the company is producing less profit from its investments and its total assets are decreasing. So after glancing at the trends within Harbin Hatou InvestmentLtd (SHSE:600864), we weren't too hopeful.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Harbin Hatou InvestmentLtd is:

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%. Ultimately, that's a low return and it under-performs the Water Utilities industry average of 6.2%.

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Harbin Hatou InvestmentLtd.

What Can We Tell From Harbin Hatou InvestmentLtd's ROCE Trend?

The trend of ROCE at Harbin Hatou InvestmentLtd is showing some signs of weakness. To be more specific, today's ROCE was 2.8% five years ago but has since fallen to 0.9%. On top of that, the business is utilizing 21% less capital within its operations. The fact that both are shrinking is an indication that the business is going through some tough times. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

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. It should come as no surprise then that the stock has fallen 35% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you want to continue researching Harbin Hatou InvestmentLtd, you might be interested to know about the 1 warning sign that our analysis has discovered.

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.

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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.