Stock Analysis

There Are Reasons To Feel Uneasy About Winson Holdings Hong Kong's (HKG:6812) Returns On Capital

SEHK:6812
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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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 Winson Holdings Hong Kong (HKG:6812) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Winson Holdings Hong Kong is:

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

0.13 = HK$29m ÷ (HK$268m - HK$53m) (Based on the trailing twelve months to September 2022).

Thus, Winson Holdings Hong Kong has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 8.2% generated by the Commercial Services industry.

See our latest analysis for Winson Holdings Hong Kong

roce
SEHK:6812 Return on Capital Employed February 6th 2023

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Winson Holdings Hong Kong has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

When we looked at the ROCE trend at Winson Holdings Hong Kong, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 13% from 22% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Winson Holdings Hong Kong has decreased its current liabilities to 20% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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.

Our Take On Winson Holdings Hong Kong's ROCE

In summary, Winson Holdings Hong Kong is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 17% in the last five years. Therefore based on the analysis done in this article, we don't think Winson Holdings Hong Kong has the makings of a multi-bagger.

If you'd like to know about the risks facing Winson Holdings Hong Kong, we've discovered 3 warning signs that you should be aware of.

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.

Valuation is complex, but we're helping make it simple.

Find out whether Winson Holdings Hong Kong is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.