Returns On Capital Signal Difficult Times Ahead For Weiqiao Textile (HKG:2698)

By
Simply Wall St
Published
March 23, 2022
SEHK:2698
Source: Shutterstock

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. Having said that, after a brief look, Weiqiao Textile (HKG:2698) we aren't filled with optimism, but let's investigate further.

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. Analysts use this formula to calculate it for Weiqiao Textile:

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

0.037 = CN¥728m ÷ (CN¥25b - CN¥5.5b) (Based on the trailing twelve months to December 2021).

Thus, Weiqiao Textile has an ROCE of 3.7%. Ultimately, that's a low return and it under-performs the Luxury industry average of 7.6%.

See our latest analysis for Weiqiao Textile

roce
SEHK:2698 Return on Capital Employed March 23rd 2022

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're interested in investigating Weiqiao Textile's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

The trend of ROCE at Weiqiao Textile is showing some signs of weakness. To be more specific, today's ROCE was 7.1% five years ago but has since fallen to 3.7%. In addition to that, Weiqiao Textile is now employing 21% less capital than it was five years ago. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. If these underlying trends continue, we wouldn't be too optimistic going forward.

Our Take On Weiqiao Textile's ROCE

To see Weiqiao Textile reducing the capital employed in the business in tandem with diminishing returns, is concerning. Long term shareholders who've owned the stock over the last five years have experienced a 46% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you want to know some of the risks facing Weiqiao Textile we've found 2 warning signs (1 is concerning!) that you should be aware of before investing here.

While Weiqiao Textile 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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