These Return Metrics Don't Make Huarui Electrical ApplianceLtd (SZSE:300626) Look Too Strong

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. 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. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. And from a first read, things don't look too good at Huarui Electrical ApplianceLtd (SZSE:300626), so let's see why.

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. To calculate this metric for Huarui Electrical ApplianceLtd, this is the formula:

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

0.044 = CN¥26m ÷ (CN¥1.0b - CN¥458m) (Based on the trailing twelve months to March 2024).

Therefore, Huarui Electrical ApplianceLtd has an ROCE of 4.4%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 6.0%.

See our latest analysis for Huarui Electrical ApplianceLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Huarui Electrical ApplianceLtd's ROCE against it's prior returns. If you'd like to look at how Huarui Electrical ApplianceLtd has performed in the past in other metrics, you can view this free graph of Huarui Electrical ApplianceLtd's past earnings, revenue and cash flow.

What Can We Tell From Huarui Electrical ApplianceLtd's ROCE Trend?

We are a bit worried about the trend of returns on capital at Huarui Electrical ApplianceLtd. About five years ago, returns on capital were 9.6%, however they're now substantially lower than that as we saw above. 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 Huarui Electrical ApplianceLtd to turn into a multi-bagger.

On a separate but related note, it's important to know that Huarui Electrical ApplianceLtd has a current liabilities to total assets ratio of 44%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

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 haven't taken kindly to these developments, since the stock has declined 13% 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 more about Huarui Electrical ApplianceLtd, we've spotted 3 warning signs, and 2 of them are a bit concerning.

While Huarui Electrical ApplianceLtd 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.