If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after glancing at the trends within Hiconics Eco-energy Technology (SZSE:300048), we weren't too hopeful.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Hiconics Eco-energy Technology, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0049 = CN¥9.6m ÷ (CN¥2.8b - CN¥827m) (Based on the trailing twelve months to June 2023).
So, Hiconics Eco-energy Technology has an ROCE of 0.5%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 6.4%.
View our latest analysis for Hiconics Eco-energy Technology
In the above chart we have measured Hiconics Eco-energy Technology's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Hiconics Eco-energy Technology.
How Are Returns Trending?
The trend of ROCE doesn't look fantastic because it's fallen from 1.0% five years ago and the business is utilizing 37% less capital, even after their capital raise (conducted prior to the latest reporting period).
The Bottom Line
To see Hiconics Eco-energy Technology reducing the capital employed in the business in tandem with diminishing returns, is concerning. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 111%. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.
If you want to continue researching Hiconics Eco-energy Technology, you might be interested to know about the 2 warning signs that our analysis has discovered.
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.