There's Been No Shortage Of Growth Recently For Wing Chi Holdings' (HKG:6080) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. So when we looked at Wing Chi Holdings (HKG:6080) and its trend of ROCE, we really liked what we saw.

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. Analysts use this formula to calculate it for Wing Chi Holdings:

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

0.02 = HK$2.8m ÷ (HK$244m - HK$104m) (Based on the trailing twelve months to September 2023).

Thus, Wing Chi Holdings has an ROCE of 2.0%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 7.8%.

View our latest analysis for Wing Chi Holdings

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'd like to look at how Wing Chi Holdings has performed in the past in other metrics, you can view this free graph of Wing Chi Holdings' past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

We're delighted to see that Wing Chi Holdings is reaping rewards from its investments and has now broken into profitability. While the business is profitable now, it used to be incurring losses on invested capital five years ago. Additionally, the business is utilizing 24% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 42% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

Our Take On Wing Chi Holdings' ROCE

In summary, it's great to see that Wing Chi Holdings has been able to turn things around and earn higher returns on lower amounts of capital. However the stock is down a substantial 91% in the last five years so there could be other areas of the business hurting its prospects. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

Wing Chi Holdings does have some risks, we noticed 2 warning signs (and 1 which is significant) we think you should know about.

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.