Here's What's Concerning About Huisen Household International Group's (HKG:2127) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Huisen Household International Group (HKG:2127), it didn't seem to tick all of these boxes.

Understanding 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 Huisen Household International Group:

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

0.062 = CN¥319m ÷ (CN¥5.7b - CN¥549m) (Based on the trailing twelve months to December 2022).

Thus, Huisen Household International Group has an ROCE of 6.2%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 8.2%.

Check out our latest analysis for Huisen Household International 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 Huisen Household International Group's past further, check out this free graph of past earnings, revenue and cash flow.

SWOT Analysis for Huisen Household International Group

What Can We Tell From Huisen Household International Group's ROCE Trend?

When we looked at the ROCE trend at Huisen Household International Group, we didn't gain much confidence. Around five years ago the returns on capital were 30%, but since then they've fallen to 6.2%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a related note, Huisen Household International Group has decreased its current liabilities to 9.6% 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.

Our Take On Huisen Household International Group's ROCE

We're a bit apprehensive about Huisen Household International Group because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Unsurprisingly then, the stock has dived 73% over the last year, so investors are recognizing these changes and don't like the company's prospects. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you'd like to know more about Huisen Household International Group, we've spotted 5 warning signs, and 1 of them is a bit unpleasant.

While Huisen Household International 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.