Win Hanverky Holdings' (HKG:3322) Returns On Capital Tell Us There Is Reason To Feel Uneasy

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. In light of that, from a first glance at Win Hanverky Holdings (HKG:3322), we've spotted some signs that it could be struggling, so let's investigate.

Return On Capital Employed (ROCE): What is it?

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 Win Hanverky Holdings, this is the formula:

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

0.042 = HK$94m ÷ (HK$3.9b - HK$1.7b) (Based on the trailing twelve months to June 2021).

So, Win Hanverky Holdings has an ROCE of 4.2%. Ultimately, that's a low return and it under-performs the Luxury industry average of 7.0%.

See our latest analysis for Win Hanverky Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Win Hanverky Holdings' ROCE against it's prior returns. If you'd like to look at how Win Hanverky Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Win Hanverky Holdings' ROCE Trend?

There is reason to be cautious about Win Hanverky Holdings, given the returns are trending downwards. About five years ago, returns on capital were 12%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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 Win Hanverky Holdings becoming one if things continue as they have.

On a side note, Win Hanverky Holdings' current liabilities have increased over the last five years to 44% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 4.2%. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

The Bottom Line On Win Hanverky Holdings' ROCE

In summary, it's unfortunate that Win Hanverky Holdings is generating lower returns from the same amount of capital. This could explain why the stock has sunk a total of 71% in the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing: We've identified 2 warning signs with Win Hanverky Holdings (at least 1 which can't be ignored) , and understanding these would certainly be useful.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.