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? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. 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)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Weiqiao Textile, this is the formula:

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%. Ultimately, that's a low return and it under-performs the Luxury industry average of 7.8%.

See our latest analysis for Weiqiao Textile

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 want to delve into the historical earnings, revenue and cash flow of Weiqiao Textile, check out these free graphs here.

So How Is Weiqiao Textile's ROCE Trending?

We are a bit anxious about the trends of ROCE at Weiqiao Textile. 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. 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. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

The Key Takeaway

In summary, it's unfortunate that Weiqiao Textile is shrinking its capital base and also generating lower returns. Investors haven't taken kindly to these developments, since the stock has declined 43% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Weiqiao Textile does have some risks, we noticed 3 warning signs (and 1 which is a bit unpleasant) we think you should know about.

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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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.
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