The Returns On Capital At Huabao Flavours & Fragrances (SZSE:300741) Don't Inspire Confidence

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. 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. Basically the company is earning less on its investments and it is also reducing its total assets. On that note, looking into Huabao Flavours & Fragrances (SZSE:300741), we weren't too upbeat about how things were going.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Huabao Flavours & Fragrances:

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

0.034 = CN¥259m ÷ (CN¥8.2b - CN¥541m) (Based on the trailing twelve months to March 2024).

Therefore, Huabao Flavours & Fragrances has an ROCE of 3.4%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 5.5%.

See our latest analysis for Huabao Flavours & Fragrances

Historical performance is a great place to start when researching a stock so above you can see the gauge for Huabao Flavours & Fragrances' 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 Huabao Flavours & Fragrances.

The Trend Of ROCE

We are a bit worried about the trend of returns on capital at Huabao Flavours & Fragrances. To be more specific, the ROCE was 12% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Huabao Flavours & Fragrances to turn into a multi-bagger.

What We Can Learn From Huabao Flavours & Fragrances' ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. It should come as no surprise then that the stock has fallen 30% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a final note, we found 3 warning signs for Huabao Flavours & Fragrances (2 are a bit concerning) you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.