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

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. 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 indicates the company is producing less profit from its investments and its total assets are decreasing. In light of that, from a first glance at Harbin Hatou InvestmentLtd (SHSE:600864), we've spotted some signs that it could be struggling, so let's investigate.

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

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. The formula for this calculation on Harbin Hatou InvestmentLtd is:

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

0.0084 = CN¥140m ÷ (CN¥43b - CN¥26b) (Based on the trailing twelve months to September 2024).

Thus, Harbin Hatou InvestmentLtd has an ROCE of 0.8%. Ultimately, that's a low return and it under-performs the Water Utilities industry average of 6.2%.

Check out 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.

The Trend Of ROCE

In terms of Harbin Hatou InvestmentLtd's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 2.9% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Harbin Hatou InvestmentLtd to turn into a multi-bagger.

On a side note, Harbin Hatou InvestmentLtd's current liabilities are still rather high at 61% 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Harbin Hatou InvestmentLtd's ROCE

In summary, it's unfortunate that Harbin Hatou InvestmentLtd is generating lower returns from the same amount of capital. And long term shareholders have watched their investments stay flat over the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Harbin Hatou InvestmentLtd does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.