If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? 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 Huabao International Holdings (HKG:336), we weren't too hopeful.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Huabao International Holdings, this is the formula:

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

0.019 = CN¥274m ÷ (CN¥15b - CN¥934m) (Based on the trailing twelve months to June 2024).

Thus, Huabao International Holdings has an ROCE of 1.9%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 6.0%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Huabao International Holdings' ROCE against it's prior returns. If you're interested in investigating Huabao International Holdings' past further, check out this free graph covering Huabao International Holdings' past earnings, revenue and cash flow.

What Does the ROCE Trend For Huabao International Holdings Tell Us?

We are a bit worried about the trend of returns on capital at Huabao International Holdings. About five years ago, returns on capital were 10%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Huabao International Holdings to turn into a multi-bagger.

What We Can Learn From Huabao International Holdings' ROCE

In summary, it's unfortunate that Huabao International Holdings is generating lower returns from the same amount of capital. And long term shareholders have watched their investments stay flat over the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Huabao International Holdings (of which 1 is potentially serious!) that you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.