Investors Could Be Concerned With Watts International Maritime Engineering's (HKG:2258) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Watts International Maritime Engineering (HKG:2258) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Watts International Maritime Engineering, this is the formula:

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

0.10 = CN¥98m ÷ (CN¥3.4b - CN¥2.5b) (Based on the trailing twelve months to December 2020).

Thus, Watts International Maritime Engineering has an ROCE of 10%. That's a relatively normal return on capital, and it's around the 9.1% generated by the Construction industry.

View our latest analysis for Watts International Maritime Engineering

Historical performance is a great place to start when researching a stock so above you can see the gauge for Watts International Maritime Engineering's ROCE against it's prior returns. If you'd like to look at how Watts International Maritime Engineering has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

On the surface, the trend of ROCE at Watts International Maritime Engineering doesn't inspire confidence. To be more specific, ROCE has fallen from 20% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a separate but related note, it's important to know that Watts International Maritime Engineering has a current liabilities to total assets ratio of 72%, 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

In summary, we're somewhat concerned by Watts International Maritime Engineering's diminishing returns on increasing amounts of capital. Long term shareholders who've owned the stock over the last year have experienced a 33% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you want to continue researching Watts International Maritime Engineering, you might be interested to know about the 5 warning signs that our analysis has discovered.

While Watts International Maritime Engineering 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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