Returns On Capital Signal Difficult Times Ahead For Dekon Food and Agriculture Group (HKG:2419)

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. So after we looked into Dekon Food and Agriculture Group (HKG:2419), the trends above didn't look too great.

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 Dekon Food and Agriculture Group is:

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

0.041 = CN¥450m ÷ (CN¥22b - CN¥11b) (Based on the trailing twelve months to June 2024).

Thus, Dekon Food and Agriculture Group has an ROCE of 4.1%. Ultimately, that's a low return and it under-performs the Food industry average of 7.5%.

See our latest analysis for Dekon Food and Agriculture Group

In the above chart we have measured Dekon Food and Agriculture Group's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Dekon Food and Agriculture Group .

What Can We Tell From Dekon Food and Agriculture Group's ROCE Trend?

We are a bit worried about the trend of returns on capital at Dekon Food and Agriculture Group. Unfortunately the returns on capital have diminished from the 12% that they were earning three years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Dekon Food and Agriculture Group becoming one if things continue as they have.

On a side note, Dekon Food and Agriculture Group's current liabilities have increased over the last three years to 50% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 4.1%. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

In Conclusion...

In summary, it's unfortunate that Dekon Food and Agriculture Group is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 14% over the last year, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you'd like to know more about Dekon Food and Agriculture Group, we've spotted 2 warning signs, and 1 of them is significant.

While Dekon Food and Agriculture 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.