Wah Sun Handbags International Holdings (HKG:2683) Is Reinvesting At Lower Rates Of Return

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Wah Sun Handbags International Holdings (HKG:2683) 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 Wah Sun Handbags International Holdings, this is the formula:

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

0.093 = HK$26m ÷ (HK$412m - HK$133m) (Based on the trailing twelve months to September 2023).

Therefore, Wah Sun Handbags International Holdings has an ROCE of 9.3%. In absolute terms, that's a low return but it's around the Luxury industry average of 11%.

See our latest analysis for Wah Sun Handbags International Holdings

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

The Trend Of ROCE

On the surface, the trend of ROCE at Wah Sun Handbags International Holdings doesn't inspire confidence. Over the last five years, returns on capital have decreased to 9.3% from 23% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Wah Sun Handbags International Holdings has done well to pay down its current liabilities to 32% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Wah Sun Handbags International Holdings' ROCE

To conclude, we've found that Wah Sun Handbags International Holdings is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 12% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

One more thing: We've identified 3 warning signs with Wah Sun Handbags International Holdings (at least 1 which makes us a bit uncomfortable) , and understanding these would certainly be useful.

While Wah Sun Handbags International Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.