If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. Having said that, after a brief look, Hunan Development Group (SZSE:000722) we aren't filled with optimism, but let's investigate further.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Hunan Development Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.00058 = CN¥1.9m ÷ (CN¥3.4b - CN¥132m) (Based on the trailing twelve months to September 2023).
Thus, Hunan Development Group has an ROCE of 0.06%. Ultimately, that's a low return and it under-performs the Renewable Energy industry average of 5.6%.
View our latest analysis for Hunan Development Group
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 want to delve into the historical earnings, revenue and cash flow of Hunan Development Group, check out these free graphs here.
What Does the ROCE Trend For Hunan Development Group Tell Us?
We are a bit worried about the trend of returns on capital at Hunan Development Group. Unfortunately the returns on capital have diminished from the 1.4% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Hunan Development Group becoming one if things continue as they have.
In Conclusion...
In summary, it's unfortunate that Hunan Development Group is generating lower returns from the same amount of capital. However the stock has delivered a 79% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.
On a final note, we found 3 warning signs for Hunan Development Group (1 makes us a bit uncomfortable) you should be aware of.
While Hunan Development 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.