Some Investors May Be Worried About Weiqiao Textile's (HKG:2698) Returns On Capital

What financial metrics can indicate to us that a company is maturing or even in decline? 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. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after we looked into Weiqiao Textile (HKG:2698), the trends above didn't look too great.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Weiqiao Textile is:

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

0.028 = CN¥534m ÷ (CN¥24b - CN¥5.7b) (Based on the trailing twelve months to December 2020).

So, Weiqiao Textile has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 7.4%.

See our latest analysis for Weiqiao Textile

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

What The Trend Of ROCE Can Tell Us

The trend of ROCE at Weiqiao Textile is showing some signs of weakness. Unfortunately, returns have declined substantially over the last five years to the 2.8% we see today. In addition to that, Weiqiao Textile is now employing 24% less capital than it was five years ago. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. If these underlying trends continue, we wouldn't be too optimistic going forward.

The Bottom Line On Weiqiao Textile's ROCE

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. Long term shareholders who've owned the stock over the last five years have experienced a 50% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you'd like to know more about Weiqiao Textile, we've spotted 2 warning signs, and 1 of them shouldn't be ignored.

While Weiqiao Textile 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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