Returns On Capital At Wing Chi Holdings (HKG:6080) Paint A Concerning Picture

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. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Wing Chi Holdings (HKG:6080) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 Wing Chi Holdings, this is the formula:

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

0.03 = HK$3.8m ÷ (HK$215m - HK$89m) (Based on the trailing twelve months to March 2022).

Thus, Wing Chi Holdings has an ROCE of 3.0%. Ultimately, that's a low return and it under-performs the Construction industry average of 7.0%.

Our analysis indicates that 6080 is potentially overvalued!

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

What Does the ROCE Trend For Wing Chi Holdings Tell Us?

In terms of Wing Chi Holdings' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 3.0% from 45% five years ago. However it looks like Wing Chi 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.

Another thing to note, Wing Chi Holdings has a high ratio of current liabilities to total assets of 41%. 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 Bottom Line On Wing Chi Holdings' ROCE

Bringing it all together, while we're somewhat encouraged by Wing Chi Holdings' reinvestment in its own business, we're aware that returns are shrinking. It seems that investors have little hope of these trends getting any better and that may have partly contributed to the stock collapsing 83% in the last three years. 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.

Like most companies, Wing Chi Holdings does come with some risks, and we've found 2 warning signs that you should be aware of.

While Wing Chi Holdings 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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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.