When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. 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. The formula for this calculation on Harbin Hatou InvestmentLtd is:

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

0.0084 = CN¥140m ÷ (CN¥43b - CN¥26b) (Based on the trailing twelve months to September 2024).

So, Harbin Hatou InvestmentLtd has an ROCE of 0.8%. Ultimately, that's a low return and it under-performs the Water Utilities industry average of 6.2%.

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're interested in investigating Harbin Hatou InvestmentLtd's past further, check out this free graph covering Harbin Hatou InvestmentLtd's past earnings, revenue and cash flow.

So How Is Harbin Hatou InvestmentLtd's ROCE Trending?

In terms of Harbin Hatou InvestmentLtd's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 2.9% 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. 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 Harbin Hatou InvestmentLtd to turn into a multi-bagger.

On a side note, Harbin Hatou InvestmentLtd's current liabilities are still rather high at 61% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

In summary, it's unfortunate that Harbin Hatou InvestmentLtd is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 4.2% 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.

If you'd like to know more about Harbin Hatou InvestmentLtd, we've spotted 2 warning signs, and 1 of them doesn't sit too well with us.

While Harbin Hatou InvestmentLtd 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.