Capital Allocation Trends At DaChan Food (Asia) (HKG:3999) Aren't Ideal

When researching a stock for investment, what can tell us that the company is in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after glancing at the trends within DaChan Food (Asia) (HKG:3999), we weren't too hopeful.

What Is 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. To calculate this metric for DaChan Food (Asia), this is the formula:

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

0.048 = CN¥134m ÷ (CN¥3.9b - CN¥1.1b) (Based on the trailing twelve months to September 2023).

Therefore, DaChan Food (Asia) has an ROCE of 4.8%. In absolute terms, that's a low return and it also under-performs the Food industry average of 9.3%.

View our latest analysis for DaChan Food (Asia)

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 DaChan Food (Asia)'s past further, check out this free graph covering DaChan Food (Asia)'s past earnings, revenue and cash flow.

What Does the ROCE Trend For DaChan Food (Asia) Tell Us?

In terms of DaChan Food (Asia)'s historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 6.6%, however they're now substantially lower than that as we saw above. 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 DaChan Food (Asia) becoming one if things continue as they have.

The Bottom Line

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. In spite of that, the stock has delivered a 6.8% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

On a final note, we've found 1 warning sign for DaChan Food (Asia) that we think you should be aware of.

While DaChan Food (Asia) isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.