Wing Yip Food Holdings Group's (KOSDAQ:900340) Returns On Capital Not Reflecting Well On The Business

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Wing Yip Food Holdings Group (KOSDAQ:900340), 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 Wing Yip Food Holdings Group, this is the formula:

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

0.10 = ₩23b ÷ (₩262b - ₩33b) (Based on the trailing twelve months to June 2024).

Thus, Wing Yip Food Holdings Group has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 7.4% generated by the Food industry.

See our latest analysis for Wing Yip Food Holdings Group

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

What The Trend Of ROCE Can Tell Us

The trend of ROCE doesn't look fantastic because it's fallen from 25% five years ago, while the business's capital employed increased by 141%. That being said, Wing Yip Food Holdings Group raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Wing Yip Food Holdings Group probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt. Also, we found that by looking at the company's latest EBIT, the figure is within 10% of the previous year's EBIT so you can basically assign the ROCE drop primarily to that capital raise.

On a related note, Wing Yip Food Holdings Group has decreased its current liabilities to 13% 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.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Wing Yip Food Holdings Group's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 23% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

If you want to know some of the risks facing Wing Yip Food Holdings Group we've found 3 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.

While Wing Yip Food Holdings Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.