Returns On Capital Signal Tricky Times Ahead For Wei Yuan Holdings (HKG:1343)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Wei Yuan Holdings (HKG:1343), we don't think it's current trends fit the mold of a multi-bagger.

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. The formula for this calculation on Wei Yuan Holdings is:

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

0.058 = S$3.6m ÷ (S$109m - S$47m) (Based on the trailing twelve months to June 2023).

Thus, Wei Yuan Holdings has an ROCE of 5.8%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 8.3%.

Check out our latest analysis for Wei Yuan Holdings

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

What Does the ROCE Trend For Wei Yuan Holdings Tell Us?

In terms of Wei Yuan Holdings' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 5.8% from 28% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Wei Yuan Holdings' current liabilities are still rather high at 43% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Wei Yuan Holdings' reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 14% over the last three years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with Wei Yuan Holdings (including 1 which is potentially serious) .

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.