To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. 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. 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. Having said that, after a brief look, Dekon Food and Agriculture Group (HKG:2419) we aren't filled with optimism, but let's investigate further.

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 Dekon Food and Agriculture Group, this is the formula:

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

0.041 = CN¥450m ÷ (CN¥22b - CN¥11b) (Based on the trailing twelve months to June 2024).

Therefore, Dekon Food and Agriculture Group has an ROCE of 4.1%. Ultimately, that's a low return and it under-performs the Food industry average of 7.5%.

Above you can see how the current ROCE for Dekon Food and Agriculture Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Dekon Food and Agriculture Group for free.

How Are Returns Trending?

In terms of Dekon Food and Agriculture Group's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 12% three years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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 Dekon Food and Agriculture Group becoming one if things continue as they have.

On a side note, Dekon Food and Agriculture Group's current liabilities have increased over the last three years to 50% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

The Key Takeaway

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.

If you want to know some of the risks facing Dekon Food and Agriculture Group we've found 2 warning signs (1 can't be ignored!) that you should be aware of before investing here.

While Dekon Food and Agriculture Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.