What underlying fundamental trends can indicate that a company might be in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. And from a first read, things don't look too good at Wisdom Education International Holdings (HKG:6068), so let's see why.
Return On Capital Employed (ROCE): What Is It?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Wisdom Education International Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.076 = CN¥46m ÷ (CN¥1.3b - CN¥670m) (Based on the trailing twelve months to August 2024).
Thus, Wisdom Education International Holdings has an ROCE of 7.6%. In absolute terms, that's a low return but it's around the Consumer Services industry average of 9.4%.
Check out our latest analysis for Wisdom Education International Holdings
Historical performance is a great place to start when researching a stock so above you can see the gauge for Wisdom Education International Holdings' 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 Wisdom Education International Holdings .
What Can We Tell From Wisdom Education International Holdings' ROCE Trend?
The trend of returns that Wisdom Education International Holdings is generating are raising some concerns. To be more specific, today's ROCE was 12% five years ago but has since fallen to 7.6%. In addition to that, Wisdom Education International Holdings is now employing 84% less capital than it was five years ago. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. If these underlying trends continue, we wouldn't be too optimistic going forward.
While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 53%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.
Our Take On Wisdom Education International Holdings' ROCE
In summary, it's unfortunate that Wisdom Education International Holdings is shrinking its capital base and also generating lower returns. We expect this has contributed to the stock plummeting 95% during the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.
Wisdom Education International Holdings does have some risks, we noticed 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.
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. 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.