Should We Be Excited About The Trends Of Returns At Wong's International Holdings (HKG:99)?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Wong's International Holdings (HKG:99), it didn't seem to tick all of these boxes.

What is 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 Wong's International Holdings, this is the formula:

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

0.033 = HK$187m ÷ (HK$7.6b - HK$1.9b) (Based on the trailing twelve months to June 2020).

So, Wong's International Holdings has an ROCE of 3.3%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 7.7%.

See our latest analysis for Wong's International Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Wong's International Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Wong's International Holdings, check out these free graphs here.

So How Is Wong's International Holdings' ROCE Trending?

In terms of Wong's International Holdings' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 8.2%, but since then they've fallen to 3.3%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Wong's International Holdings has done well to pay down its current liabilities to 26% of total assets. So we could link some of this to the decrease in ROCE. 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, we're somewhat concerned by Wong's International Holdings' diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 16% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Like most companies, Wong's International Holdings does come with some risks, and we've found 2 warning signs that you should be aware of.

While Wong's International Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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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