China Harmony Auto Holding's (HKG:3836) Returns On Capital Not Reflecting Well On The Business

What underlying fundamental trends can indicate that a company might be in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. So after glancing at the trends within China Harmony Auto Holding (HKG:3836), we weren't too hopeful.

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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 China Harmony Auto Holding, this is the formula:

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

0.0091 = CN¥57m ÷ (CN¥12b - CN¥5.6b) (Based on the trailing twelve months to June 2025).

Thus, China Harmony Auto Holding has an ROCE of 0.9%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 7.1%.

See our latest analysis for China Harmony Auto Holding

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'd like to look at how China Harmony Auto Holding has performed in the past in other metrics, you can view this free graph of China Harmony Auto Holding's past earnings, revenue and cash flow.

What Does the ROCE Trend For China Harmony Auto Holding Tell Us?

The trend of ROCE at China Harmony Auto Holding is showing some signs of weakness. Unfortunately, returns have declined substantially over the last five years to the 0.9% we see today. What's equally concerning is that the amount of capital deployed in the business has shrunk by 21% over that same period. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. If these underlying trends continue, we wouldn't be too optimistic going forward.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 47%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

The Key Takeaway

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. It should come as no surprise then that the stock has fallen 12% over the last five years, so it looks like investors are recognizing these changes. 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 China Harmony Auto Holding, we've spotted 3 warning signs, and 2 of them are a bit concerning.

While China Harmony Auto Holding 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.