Is This A Sign of Things To Come At China Weaving Materials Holdings (HKG:3778)?

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. On that note, looking into China Weaving Materials Holdings (HKG:3778), we weren't too upbeat about how things were going.

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

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. The formula for this calculation on China Weaving Materials Holdings is:

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

0.017 = CN¥11m ÷ (CN¥1.5b - CN¥894m) (Based on the trailing twelve months to June 2020).

Thus, China Weaving Materials Holdings has an ROCE of 1.7%. 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 China Weaving Materials Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for China Weaving Materials Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of China Weaving Materials Holdings, check out these free graphs here.

The Trend Of ROCE

We are a bit anxious about the trends of ROCE at China Weaving Materials Holdings. Unfortunately, returns have declined substantially over the last five years to the 1.7% we see today. In addition to that, China Weaving Materials Holdings 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. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

Another thing to note, China Weaving Materials Holdings has a high ratio of current liabilities to total assets of 59%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

In summary, it's unfortunate that China Weaving Materials Holdings is shrinking its capital base and also generating lower returns. Investors haven't taken kindly to these developments, since the stock has declined 24% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you'd like to know more about China Weaving Materials Holdings, we've spotted 2 warning signs, and 1 of them is potentially serious.

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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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