Weiqiao Textile (HKG:2698) Will Be Hoping To Turn Its Returns On Capital Around

When researching a stock for investment, what can tell us that the company is 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. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after glancing at the trends within Weiqiao Textile (HKG:2698), we weren't too hopeful.

What is Return On Capital Employed (ROCE)?

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. 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).

Therefore, Weiqiao Textile has an ROCE of 3.7%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 10%.

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

The Trend Of ROCE

The trend of ROCE at Weiqiao Textile is showing some signs of weakness. The company used to generate 7.1% on its capital five years ago but it has since fallen noticeably. In addition to that, Weiqiao Textile is now employing 21% less capital than it was five years ago. The fact that both are shrinking is an indication that the business is going through some tough times. 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 three years have experienced a 21% 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.

Weiqiao Textile does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is potentially serious...

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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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.