Harbin Hatou InvestmentLtd (SHSE:600864) Could Be Struggling To Allocate Capital

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. And from a first read, things don't look too good at Harbin Hatou InvestmentLtd (SHSE:600864), so let's see why.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Harbin Hatou InvestmentLtd, this is the formula:

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

0.0092 = CN¥165m ÷ (CN¥35b - CN¥17b) (Based on the trailing twelve months to September 2023).

Therefore, Harbin Hatou InvestmentLtd has an ROCE of 0.9%. In absolute terms, that's a low return and it also under-performs the Water Utilities industry average of 6.2%.

See our latest analysis for Harbin Hatou InvestmentLtd

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

What The Trend Of ROCE Can Tell Us

We are a bit anxious about the trends of ROCE at Harbin Hatou InvestmentLtd. Unfortunately, returns have declined substantially over the last five years to the 0.9% we see today. On top of that, the business is utilizing 21% less capital within its operations. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. If these underlying trends continue, we wouldn't be too optimistic going forward.

Another thing to note, Harbin Hatou InvestmentLtd has a high ratio of current liabilities to total assets of 48%. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

To see Harbin Hatou InvestmentLtd reducing the capital employed in the business in tandem with diminishing returns, is concerning. Long term shareholders who've owned the stock over the last five years have experienced a 35% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a separate note, we've found 1 warning sign for Harbin Hatou InvestmentLtd you'll probably want to know about.

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.