Huayu Expressway Group (HKG:1823) Could Be At Risk Of Shrinking As A Company

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. In light of that, from a first glance at Huayu Expressway Group (HKG:1823), we've spotted some signs that it could be struggling, so let's investigate.

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. The formula for this calculation on Huayu Expressway Group is:

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

0.037 = CN¥42m ÷ (CN¥1.2b - CN¥125m) (Based on the trailing twelve months to December 2023).

Thus, Huayu Expressway Group has an ROCE of 3.7%. Ultimately, that's a low return and it under-performs the Construction industry average of 7.3%.

Check out our latest analysis for Huayu Expressway Group

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 Huayu Expressway Group's past further, check out this free graph covering Huayu Expressway Group's past earnings, revenue and cash flow.

What Can We Tell From Huayu Expressway Group's ROCE Trend?

There is reason to be cautious about Huayu Expressway Group, given the returns are trending downwards. About five years ago, returns on capital were 6.5%, however they're now substantially lower than that as we saw above. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Huayu Expressway Group becoming one if things continue as they have.

On a side note, Huayu Expressway Group has done well to pay down its current liabilities to 10.0% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Huayu Expressway Group's ROCE

In summary, it's unfortunate that Huayu Expressway Group is generating lower returns from the same amount of capital. In spite of that, the stock has delivered a 20% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

If you'd like to know more about Huayu Expressway Group, we've spotted 4 warning signs, and 1 of them is potentially serious.

While Huayu Expressway Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com