Returns On Capital Tell Us A Lot About Texwinca Holdings (HKG:321)

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. In light of that, from a first glance at Texwinca Holdings (HKG:321), we've spotted some signs that it could be struggling, so let's investigate.

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 Texwinca Holdings, this is the formula:

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

0.023 = HK$127m ÷ (HK$7.8b - HK$2.2b) (Based on the trailing twelve months to September 2020).

So, Texwinca Holdings has an ROCE of 2.3%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 9.2%.

Check out our latest analysis for Texwinca Holdings

Above you can see how the current ROCE for Texwinca Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Texwinca Holdings.

What Can We Tell From Texwinca Holdings' ROCE Trend?

There is reason to be cautious about Texwinca Holdings, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 9.5% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Texwinca Holdings to turn into a multi-bagger.

What We Can Learn From Texwinca Holdings' ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. It should come as no surprise then that the stock has fallen 66% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you want to continue researching Texwinca Holdings, you might be interested to know about the 3 warning signs that our analysis has discovered.

While Texwinca Holdings 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. 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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