Texwinca Holdings (HKG:321) Will Be Hoping To Turn Its Returns On Capital Around

What underlying fundamental trends can indicate that a company might be in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. 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. Having said that, after a brief look, Texwinca Holdings (HKG:321) we aren't filled with optimism, but let's investigate further.

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. The formula for this calculation on Texwinca Holdings is:

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).

Thus, 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 7.4%.

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 Does the ROCE Trend For Texwinca Holdings Tell Us?

In terms of Texwinca Holdings' historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 9.5%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Texwinca Holdings becoming one if things continue as they have.

What We Can Learn From Texwinca Holdings' ROCE

In summary, it's unfortunate that Texwinca Holdings is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 61% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Texwinca Holdings does have some risks, we noticed 3 warning signs (and 1 which is significant) we think you should know about.

While Texwinca Holdings 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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