Will the Promising Trends At Weiqiao Textile (HKG:2698) Continue?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Weiqiao Textile (HKG:2698) and its trend of ROCE, we really liked what we saw.

What is 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. 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)

0.018 = CN¥345m ÷ (CN¥24b - CN¥5.4b) (Based on the trailing twelve months to June 2020).

So, Weiqiao Textile has an ROCE of 1.8%. Ultimately, that's a low return and it under-performs the Luxury industry average of 9.2%.

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'd like to look at how Weiqiao Textile has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Weiqiao Textile's ROCE Trending?

It's great to see that Weiqiao Textile has started to generate some pre-tax earnings from prior investments. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 1.8% on their capital employed. In regards to capital employed, Weiqiao Textile is using 21% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

The Bottom Line On Weiqiao Textile's ROCE

From what we've seen above, Weiqiao Textile has managed to increase it's returns on capital all the while reducing it's capital base. Astute investors may have an opportunity here because the stock has declined 32% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Weiqiao Textile does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is concerning...

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. 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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