Our Take On The Returns On Capital At Wing On Company International (HKG:289)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. However, after briefly looking over the numbers, we don't think Wing On Company International (HKG:289) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. Analysts use this formula to calculate it for Wing On Company International:

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

0.022 = HK$439m ÷ (HK$20b - HK$518m) (Based on the trailing twelve months to June 2020).

So, Wing On Company International has an ROCE of 2.2%. In absolute terms, that's a low return and it also under-performs the Multiline Retail industry average of 7.2%.

See our latest analysis for Wing On Company International

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 Wing On Company International's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Wing On Company International's ROCE Trend?

On the surface, the trend of ROCE at Wing On Company International doesn't inspire confidence. To be more specific, ROCE has fallen from 3.9% over the last five years. However it looks like Wing On Company International might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line On Wing On Company International's ROCE

Bringing it all together, while we're somewhat encouraged by Wing On Company International's reinvestment in its own business, we're aware that returns are shrinking. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. Therefore based on the analysis done in this article, we don't think Wing On Company International has the makings of a multi-bagger.

Wing On Company International does have some risks, we noticed 2 warning signs (and 1 which can't be ignored) we think you should know about.

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. 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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