What financial metrics can indicate to us that a company is maturing or even in decline? 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. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. Having said that, after a brief look, Henan Huaying Agricultural Development (SZSE:002321) we aren't filled with optimism, but let's investigate further.

Return On Capital Employed (ROCE): What Is It?

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 Henan Huaying Agricultural Development, this is the formula:

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

0.023 = CN¥57m ÷ (CN¥3.5b - CN¥984m) (Based on the trailing twelve months to March 2023).

So, Henan Huaying Agricultural Development has an ROCE of 2.3%. Ultimately, that's a low return and it under-performs the Food industry average of 6.8%.

Check out our latest analysis for Henan Huaying Agricultural Development

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're interested in investigating Henan Huaying Agricultural Development's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Henan Huaying Agricultural Development's ROCE Trending?

We are a bit anxious about the trends of ROCE at Henan Huaying Agricultural Development. To be more specific, today's ROCE was 8.3% five years ago but has since fallen to 2.3%. In addition to that, Henan Huaying Agricultural Development is now employing 30% less capital than it was five years ago. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.

On a side note, Henan Huaying Agricultural Development has done well to pay down its current liabilities to 28% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Key Takeaway

To see Henan Huaying Agricultural Development reducing the capital employed in the business in tandem with diminishing returns, is concerning. Investors haven't taken kindly to these developments, since the stock has declined 61% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Henan Huaying Agricultural Development does have some risks though, and we've spotted 2 warning signs for Henan Huaying Agricultural Development that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.