If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? 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. 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, HyUnion HoldingLtd (SZSE:002537) we aren't filled with optimism, but let's investigate further.
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 HyUnion HoldingLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.024 = CN¥131m ÷ (CN¥9.3b - CN¥3.8b) (Based on the trailing twelve months to September 2023).
Therefore, HyUnion HoldingLtd has an ROCE of 2.4%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 5.8%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for HyUnion HoldingLtd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of HyUnion HoldingLtd.
What Does the ROCE Trend For HyUnion HoldingLtd Tell Us?
We aren't too thrilled by the trend because ROCE has declined 60% over the last five years and despite the capital raising conducted before the latest reports, the business has -24% less capital employed.
While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 41%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 2.4%. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.
What We Can Learn From HyUnion HoldingLtd's ROCE
To see HyUnion HoldingLtd 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 52% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
If you'd like to know about the risks facing HyUnion HoldingLtd, we've discovered 1 warning sign that you should be aware of.
While HyUnion HoldingLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.