Wine's Link International Holdings (HKG:8509) Could Be Struggling To Allocate Capital

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Having said that, from a first glance at Wine's Link International Holdings (HKG:8509) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. Analysts use this formula to calculate it for Wine's Link International Holdings:

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

0.11 = HK$28m ÷ (HK$431m - HK$167m) (Based on the trailing twelve months to June 2023).

Therefore, Wine's Link International Holdings has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Retail Distributors industry average of 4.0% it's much better.

Check out our latest analysis for Wine's Link International Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Wine's Link International Holdings' ROCE against it's prior returns. If you're interested in investigating Wine's Link International Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Wine's Link International Holdings' ROCE Trending?

On the surface, the trend of ROCE at Wine's Link International Holdings doesn't inspire confidence. Over the last five years, returns on capital have decreased to 11% from 22% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line

In summary, we're somewhat concerned by Wine's Link International Holdings' diminishing returns on increasing amounts of capital. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Wine's Link International Holdings (of which 3 are a bit concerning!) that you should know about.

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.