Watts International Maritime Engineering (HKG:2258) Might Be Having Difficulty Using Its Capital Effectively

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. 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.

Return On Capital Employed (ROCE): What is it?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the 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)

0.12 = CN¥116m ÷ (CN¥3.3b - CN¥2.3b) (Based on the trailing twelve months to June 2021).

Thus, Watts International Maritime Engineering has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Construction industry average of 8.2% it's much better.

Check out 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.

What Can We Tell From Watts International Maritime Engineering's ROCE Trend?

On the surface, the trend of ROCE at Watts International Maritime Engineering doesn't inspire confidence. Around five years ago the returns on capital were 20%, but since then they've fallen to 12%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

Another thing to note, Watts International Maritime Engineering has a high ratio of current liabilities to total assets of 70%. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Watts International Maritime Engineering's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Watts International Maritime Engineering. However, despite the promising trends, the stock has fallen 55% over the last three years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Watts International Maritime Engineering does have some risks, we noticed 4 warning signs (and 2 which don't sit too well with us) we think you should know about.

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.

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.

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