What financial metrics can indicate to us that a company is maturing or even in decline? 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. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. Having said that, after a brief look, WebX International Holdings (HKG:8521) we aren't filled with optimism, but let's investigate further.
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. To calculate this metric for WebX International Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.018 = HK$2.8m ÷ (HK$182m - HK$30m) (Based on the trailing twelve months to December 2023).
Thus, WebX International Holdings has an ROCE of 1.8%. Ultimately, that's a low return and it under-performs the Luxury industry average of 11%.
See our latest analysis for WebX International Holdings
Historical performance is a great place to start when researching a stock so above you can see the gauge for WebX International Holdings' ROCE against it's prior returns. If you'd like to look at how WebX International Holdings has performed in the past in other metrics, you can view this free graph of WebX International Holdings' past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
There is reason to be cautious about WebX International Holdings, given the returns are trending downwards. About five years ago, returns on capital were 29%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on WebX International Holdings becoming one if things continue as they have.
Our Take On WebX International Holdings' ROCE
In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 285%. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.
On a final note, we found 5 warning signs for WebX International Holdings (2 make us uncomfortable) you should be aware of.
While WebX 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. 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.