Here's What's Concerning About Winox Holdings' (HKG:6838) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Winox Holdings (HKG:6838), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Winox Holdings:

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

0.042 = HK$41m ÷ (HK$1.2b - HK$169m) (Based on the trailing twelve months to June 2024).

Therefore, Winox Holdings has an ROCE of 4.2%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 12%.

View our latest analysis for Winox Holdings

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

How Are Returns Trending?

On the surface, the trend of ROCE at Winox Holdings doesn't inspire confidence. Around five years ago the returns on capital were 22%, but since then they've fallen to 4.2%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

Our Take On Winox Holdings' ROCE

In summary, we're somewhat concerned by Winox Holdings' diminishing returns on increasing amounts of capital. We expect this has contributed to the stock plummeting 82% during the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you want to know some of the risks facing Winox Holdings we've found 4 warning signs (1 is potentially serious!) that you should be aware of before investing here.

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.