Henan Huaying Agricultural Development (SZSE:002321) May Have Issues Allocating Its Capital

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. And from a first read, things don't look too good at Henan Huaying Agricultural Development (SZSE:002321), so let's see why.

Understanding 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. Analysts use this formula to calculate it for Henan Huaying Agricultural Development:

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

0.059 = CN¥153m ÷ (CN¥3.8b - CN¥1.2b) (Based on the trailing twelve months to March 2024).

Therefore, Henan Huaying Agricultural Development has an ROCE of 5.9%. Ultimately, that's a low return and it under-performs the Food industry average of 7.6%.

See our latest analysis for Henan Huaying Agricultural Development

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're interested in investigating Henan Huaying Agricultural Development's past further, check out this free graph covering Henan Huaying Agricultural Development's past earnings, revenue and cash flow.

So How Is Henan Huaying Agricultural Development's ROCE Trending?

The trend of returns that Henan Huaying Agricultural Development is generating are raising some concerns. Unfortunately, returns have declined substantially over the last five years to the 5.9% we see today. In addition to that, Henan Huaying Agricultural Development is now employing 26% less capital than it was five years ago. The fact that both are shrinking is an indication that the business is going through some tough times. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

On a side note, Henan Huaying Agricultural Development has done well to pay down its current liabilities to 31% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

To see Henan Huaying Agricultural Development reducing the capital employed in the business in tandem with diminishing returns, is concerning. We expect this has contributed to the stock plummeting 78% during the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you'd like to know about the risks facing Henan Huaying Agricultural Development, we've discovered 1 warning sign that you should be aware of.

While Henan Huaying Agricultural Development 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.