Returns On Capital Signal Tricky Times Ahead For WH Group (HKG:288)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating WH Group (HKG:288), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for WH Group, this is the formula:

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

0.073 = US$1.1b ÷ (US$19b - US$4.1b) (Based on the trailing twelve months to December 2020).

So, WH Group has an ROCE of 7.3%. In absolute terms, that's a low return and it also under-performs the Food industry average of 13%.

View our latest analysis for WH Group

In the above chart we have measured WH Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering WH Group here for free.

The Trend Of ROCE

On the surface, the trend of ROCE at WH Group doesn't inspire confidence. Around five years ago the returns on capital were 13%, but since then they've fallen to 7.3%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

To conclude, we've found that WH Group is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 43% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

WH Group does have some risks though, and we've spotted 3 warning signs for WH Group that you might be interested in.

While WH Group 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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