The Returns On Capital At Wing On Company International (HKG:289) Don't Inspire Confidence

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? 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. Basically the company is earning less on its investments and it is also reducing its total assets. Having said that, after a brief look, Wing On Company International (HKG:289) we aren't filled with optimism, but let's investigate further.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from 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)

0.017 = HK$335m ÷ (HK$20b - HK$388m) (Based on the trailing twelve months to June 2022).

Thus, Wing On Company International has an ROCE of 1.7%. Ultimately, that's a low return and it under-performs the Multiline Retail industry average of 2.8%.

View our latest analysis for Wing On Company International

Historical performance is a great place to start when researching a stock so above you can see the gauge for Wing On Company International's ROCE against it's prior returns. 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?

We are a bit worried about the trend of returns on capital at Wing On Company International. Unfortunately the returns on capital have diminished from the 2.9% that they were earning five years ago. 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 Wing On Company International to turn into a multi-bagger.

Our Take On Wing On Company International's 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. It should come as no surprise then that the stock has fallen 41% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One more thing: We've identified 3 warning signs with Wing On Company International (at least 1 which is significant) , and understanding them would certainly be useful.

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.