Wine's Link International Holdings (HKG:8509) Will Want To Turn Around Its Return Trends

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Wine's Link International Holdings (HKG:8509), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for Wine's Link International Holdings, this is the formula:

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

0.11 = HK$26m ÷ (HK$346m - HK$117m) (Based on the trailing twelve months to December 2021).

So, Wine's Link International Holdings has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 8.9% generated by the Retail Distributors industry.

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 want to delve into the historical earnings, revenue and cash flow of Wine's Link International Holdings, check out these free graphs here.

What Can We Tell From Wine's Link International Holdings' ROCE Trend?

On the surface, the trend of ROCE at Wine's Link International Holdings doesn't inspire confidence. To be more specific, ROCE has fallen from 25% over the last five years. However it looks like Wine's Link International Holdings 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.

On a side note, Wine's Link International Holdings has done well to pay down its current liabilities to 34% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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.

In Conclusion...

In summary, Wine's Link International Holdings is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 37% in the last three years. Therefore based on the analysis done in this article, we don't think Wine's Link International Holdings has the makings of a multi-bagger.

On a final note, we've found 2 warning signs for Wine's Link International Holdings that we think you should be aware of.

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.