Wonderful Sky Financial Group Holdings (HKG:1260) Will Be Hoping To Turn Its Returns On Capital Around

When researching a stock for investment, what can tell us that the company is in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. On that note, looking into Wonderful Sky Financial Group Holdings (HKG:1260), we weren't too upbeat about how things were going.

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. The formula for this calculation on Wonderful Sky Financial Group Holdings is:

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

0.024 = HK$36m ÷ (HK$1.6b - HK$105m) (Based on the trailing twelve months to September 2023).

Therefore, Wonderful Sky Financial Group Holdings has an ROCE of 2.4%. Ultimately, that's a low return and it under-performs the Media industry average of 10%.

View our latest analysis for Wonderful Sky Financial Group Holdings

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Wonderful Sky Financial Group Holdings' past further, check out this free graph covering Wonderful Sky Financial Group Holdings' past earnings, revenue and cash flow.

So How Is Wonderful Sky Financial Group Holdings' ROCE Trending?

There is reason to be cautious about Wonderful Sky Financial Group 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. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Wonderful Sky Financial Group Holdings to turn into a multi-bagger.

On a related note, Wonderful Sky Financial Group Holdings has decreased its current liabilities to 6.6% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On Wonderful Sky Financial Group Holdings' ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. This could explain why the stock has sunk a total of 86% in the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you'd like to know more about Wonderful Sky Financial Group Holdings, we've spotted 3 warning signs, and 1 of them is significant.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.