Returns On Capital At Henan Shuanghui Investment & DevelopmentLtd (SZSE:000895) Paint A Concerning Picture

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Henan Shuanghui Investment & DevelopmentLtd (SZSE:000895), they do have a high ROCE, but we weren't exactly elated from how returns are trending.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Henan Shuanghui Investment & DevelopmentLtd, this is the formula:

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).

Therefore, Henan Shuanghui Investment & DevelopmentLtd has an ROCE of 27%. That's a fantastic return and not only that, it outpaces the average of 6.8% earned by companies in a similar industry.

Check out our latest analysis for Henan Shuanghui Investment & DevelopmentLtd

Above you can see how the current ROCE for Henan Shuanghui Investment & DevelopmentLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Henan Shuanghui Investment & DevelopmentLtd .

How Are Returns Trending?

When we looked at the ROCE trend at Henan Shuanghui Investment & DevelopmentLtd, we didn't gain much confidence. 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. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

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.

Our Take On Henan Shuanghui Investment & DevelopmentLtd's ROCE

In summary, we're somewhat concerned by Henan Shuanghui Investment & DevelopmentLtd's diminishing returns on increasing amounts of capital. Despite the concerning underlying trends, the stock has actually gained 1.6% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

On a final note, we've found 1 warning sign for Henan Shuanghui Investment & DevelopmentLtd that we think you should be aware of.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.