Investors Could Be Concerned With Henan Shuanghui Investment & DevelopmentLtd's (SZSE:000895) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So while Henan Shuanghui Investment & DevelopmentLtd (SZSE:000895) has a high ROCE right now, lets see what we can decipher from how returns are changing.

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. The formula for this calculation on Henan Shuanghui Investment & DevelopmentLtd is:

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

0.27 = CN¥5.9b ÷ (CN¥38b - CN¥17b) (Based on the trailing twelve months to September 2024).

So, Henan Shuanghui Investment & DevelopmentLtd has an ROCE of 27%. In absolute terms that's a great return and it's even better than the Food industry average of 6.8%.

Check out our latest analysis for Henan Shuanghui Investment & DevelopmentLtd

In the above chart we have measured Henan Shuanghui Investment & DevelopmentLtd's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Henan Shuanghui Investment & DevelopmentLtd .

So How Is Henan Shuanghui Investment & DevelopmentLtd's ROCE Trending?

In terms of Henan Shuanghui Investment & DevelopmentLtd's historical ROCE movements, the trend isn't fantastic. To be more specific, while the ROCE is still high, it's fallen from 39% where it was five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, Henan Shuanghui Investment & DevelopmentLtd's current liabilities are still rather high at 44% of total assets. 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.

In Conclusion...

From the above analysis, we find it rather worrisome that returns on capital and sales for Henan Shuanghui Investment & DevelopmentLtd have fallen, meanwhile the business is employing more capital than it was five years ago. Investors must expect better things on the horizon though because the stock has risen 4.9% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Henan Shuanghui Investment & DevelopmentLtd does have some risks though, and we've spotted 1 warning sign for Henan Shuanghui Investment & DevelopmentLtd that you might be interested in.

Henan Shuanghui Investment & DevelopmentLtd is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.