Wei Yuan Holdings (HKG:1343) Could Be Struggling To Allocate Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Wei Yuan Holdings (HKG:1343), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for Wei Yuan Holdings, this is the formula:

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

0.077 = S$4.8m ÷ (S$104m - S$42m) (Based on the trailing twelve months to June 2024).

So, Wei Yuan Holdings has an ROCE of 7.7%. In absolute terms, that's a low return, but it's much better than the Construction industry average of 5.7%.

See 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're interested in investigating Wei Yuan Holdings' past further, check out this free graph covering Wei Yuan Holdings' past earnings, revenue and cash flow.

What Can We Tell From Wei Yuan Holdings' ROCE Trend?

In terms of Wei Yuan Holdings' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 33%, but since then they've fallen to 7.7%. However it looks like Wei Yuan Holdings might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a separate but related note, it's important to know that Wei Yuan Holdings has a current liabilities to total assets ratio of 40%, which we'd consider pretty high. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Wei Yuan Holdings' ROCE

To conclude, we've found that Wei Yuan Holdings is reinvesting in the business, but returns have been falling. Since the stock has declined 32% over the last three years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Wei Yuan Holdings does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those are a bit unpleasant...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.