Huabao International Holdings (HKG:336) Will Be Looking To Turn Around Its Returns

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. In light of that, from a first glance at Huabao International Holdings (HKG:336), we've spotted some signs that it could be struggling, so let's investigate.

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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. To calculate this metric for Huabao International Holdings, this is the formula:

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

0.01 = CN¥143m ÷ (CN¥15b - CN¥924m) (Based on the trailing twelve months to June 2025).

Therefore, Huabao International Holdings has an ROCE of 1.0%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 8.5%.

View our latest analysis for Huabao International Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Huabao International Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Huabao International Holdings.

What Does the ROCE Trend For Huabao International Holdings Tell Us?

We are a bit worried about the trend of returns on capital at Huabao International Holdings. Unfortunately the returns on capital have diminished from the 9.8% that they were earning five 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 Huabao International Holdings becoming one if things continue as they have.

What We Can Learn From Huabao International Holdings' ROCE

In summary, it's unfortunate that Huabao International Holdings is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last five years have experienced a 51% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with Huabao International Holdings (including 1 which is significant) .

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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.