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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at WH Group (HKG:288), 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. The formula for this calculation on WH Group is:

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

0.12 = US$1.8b ÷ (US$20b - US$5.0b) (Based on the trailing twelve months to December 2022).

Therefore, WH Group has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Food industry average of 9.7% it's much better.

See 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.

What Does the ROCE Trend For WH Group Tell Us?

When we looked at the ROCE trend at WH Group, we didn't gain much confidence. Around five years ago the returns on capital were 18%, but since then they've fallen to 12%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From WH Group's ROCE

To conclude, we've found that WH Group is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 40% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

One more thing, we've spotted 3 warning signs facing WH Group that you might find interesting.

While WH Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.