Wisdom Marine Lines (TPE:2637) Will Be Hoping To Turn Its Returns On Capital Around

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. So after we looked into Wisdom Marine Lines (TPE:2637), the trends above didn't look too great.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Wisdom Marine Lines:

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

0.019 = US$51m ÷ (US$2.9b - US$326m) (Based on the trailing twelve months to December 2020).

Thus, Wisdom Marine Lines has an ROCE of 2.0%. Ultimately, that's a low return and it under-performs the Shipping industry average of 3.5%.

See 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 The Trend Of ROCE Can Tell Us

In terms of Wisdom Marine Lines' historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 3.3% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Wisdom Marine Lines to turn into a multi-bagger.

Our Take On Wisdom Marine Lines' ROCE

In summary, it's unfortunate that Wisdom Marine Lines is generating lower returns from the same amount of capital. Despite the concerning underlying trends, the stock has actually gained 21% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

One final note, you should learn about the 7 warning signs we've spotted with Wisdom Marine Lines (including 2 which are a bit unpleasant) .

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. 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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