How Well Is Wisdom Marine Lines (TPE:2637) Allocating Its Capital?

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? 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. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after we looked into Wisdom Marine Lines (TPE:2637), the trends above didn't look too great.

Return On Capital Employed (ROCE): What is it?

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. The formula for this calculation on Wisdom Marine Lines is:

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

0.023 = US$56m ÷ (US$2.9b - US$432m) (Based on the trailing twelve months to September 2020).

Thus, Wisdom Marine Lines has an ROCE of 2.3%. In absolute terms, that's a low return and it also under-performs the Shipping industry average of 3.5%.

Check out our latest analysis for Wisdom Marine Lines

Above you can see how the current ROCE for Wisdom Marine Lines compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Wisdom Marine Lines here for free.

What Does the ROCE Trend For Wisdom Marine Lines Tell Us?

In terms of Wisdom Marine Lines' historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 3.2%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Wisdom Marine Lines becoming one if things continue as they have.

In Conclusion...

In summary, it's unfortunate that Wisdom Marine Lines is generating lower returns from the same amount of capital. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 5 warning signs for Wisdom Marine Lines (of which 1 shouldn't be ignored!) 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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