Watts International Maritime Engineering (HKG:2258) May Have Issues Allocating Its 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Watts International Maritime Engineering (HKG:2258) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Watts International Maritime Engineering:

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

0.12 = CN¥111m ÷ (CN¥3.4b - CN¥2.5b) (Based on the trailing twelve months to December 2020).

So, Watts International Maritime Engineering has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 7.4% generated by the Construction industry.

See 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're interested in investigating Watts International Maritime Engineering's past further, check out 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. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

Another thing to note, Watts International Maritime Engineering has a high ratio of current liabilities to total assets of 72%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Watts International Maritime Engineering's ROCE

We're a bit apprehensive about Watts International Maritime Engineering because despite more capital being deployed in the business, returns on that capital and sales have both fallen. And, the stock has remained flat over the last year, so investors don't seem too impressed either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One more thing, we've spotted 4 warning signs facing Watts International Maritime Engineering that you might find interesting.

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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