Wing Fung Group Asia (HKG:8526) Will Will Want To Turn Around Its Return Trends

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. So while Wing Fung Group Asia (HKG:8526) has a high ROCE right now, lets see what we can decipher from how returns are changing.

Understanding Return On Capital Employed (ROCE)

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 Fung Group Asia:

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

0.23 = HK$29m ÷ (HK$217m - HK$91m) (Based on the trailing twelve months to March 2021).

Therefore, Wing Fung Group Asia has an ROCE of 23%. That's a fantastic return and not only that, it outpaces the average of 9.2% earned by companies in a similar industry.

See our latest analysis for Wing Fung Group Asia

Historical performance is a great place to start when researching a stock so above you can see the gauge for Wing Fung Group Asia's ROCE against it's prior returns. If you'd like to look at how Wing Fung Group Asia 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 Wing Fung Group Asia's ROCE Trend?

In terms of Wing Fung Group Asia's historical ROCE movements, the trend isn't fantastic. To be more specific, while the ROCE is still high, it's fallen from 58% where it was five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Wing Fung Group Asia has done well to pay down its current liabilities to 42% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

In Conclusion...

While returns have fallen for Wing Fung Group Asia in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 56% in the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you'd like to know about the risks facing Wing Fung Group Asia, we've discovered 2 warning signs that you should be aware of.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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