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 indicates the company is producing less profit from its investments and its total assets are decreasing. In light of that, from a first glance at Hla Group (SHSE:600398), we've spotted some signs that it could be struggling, so let's investigate.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Hla Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = CN¥3.4b ÷ (CN¥30b - CN¥12b) (Based on the trailing twelve months to September 2023).
So, Hla Group has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 4.9% generated by the Specialty Retail industry.
See our latest analysis for Hla Group
In the above chart we have measured Hla Group'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 Hla Group.
What Can We Tell From Hla Group's ROCE Trend?
In terms of Hla Group's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 28% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Hla Group to turn into a multi-bagger.
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. Investors must expect better things on the horizon though because the stock has risen 20% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.
Like most companies, Hla Group does come with some risks, and we've found 1 warning sign that you should be aware of.
While Hla 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.