Is Hunya Foods (TPE:1236) Shrinking?

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? 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. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after glancing at the trends within Hunya Foods (TPE:1236), we weren't too hopeful.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Hunya Foods:

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

0.006 = NT$13m ÷ (NT$2.7b - NT$481m) (Based on the trailing twelve months to September 2020).

Thus, Hunya Foods has an ROCE of 0.6%. Ultimately, that's a low return and it under-performs the Food industry average of 8.5%.

View our latest analysis for Hunya Foods

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 Hunya Foods' past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

We are a bit worried about the trend of returns on capital at Hunya Foods. About five years ago, returns on capital were 4.0%, 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. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Hunya Foods becoming one if things continue as they have.

The Bottom Line On Hunya Foods' ROCE

In summary, it's unfortunate that Hunya Foods is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 27% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing: We've identified 3 warning signs with Hunya Foods (at least 1 which makes us a bit uncomfortable) , and understanding these would certainly be useful.

While Hunya Foods 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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