WH Group (HKG:288) Hasn't Managed To Accelerate Its Returns
WH Group (HKG:288) has shown stable returns on capital employed (ROCE) at 17%, better than the Food industry average of 13%. However, over the past five years, both ROCE and capital employed have remained flat, indicating a mature business with limited reinvestment opportunities. Consequently, WH Group has been distributing 60% of its earnings to shareholders. Despite an 81% stock gain over five years, the company is unlikely to become a multi-bagger. Investors should note two warning signs for WH Group.
To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at WH Group (HKG:288) and its ROCE trend, we weren't exactly thrilled.
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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 WH Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.17 = US$2.7b ÷ (US$21b - US$4.7b) (Based on the trailing twelve months to June 2025).
Thus, WH Group has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 13% generated by the Food industry.
Check out our latest analysis for WH Group
Above you can see how the current ROCE for WH Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for WH Group .
So How Is WH Group's ROCE Trending?
Over the past five years, WH Group's ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if WH Group doesn't end up being a multi-bagger in a few years time. With fewer investment opportunities, it makes sense that WH Group has been paying out a decent 60% of its earnings to shareholders. Given the business isn't reinvesting in itself, it makes sense to distribute a portion of earnings among shareholders.
What We Can Learn From WH Group's ROCE
In summary, WH Group isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Although the market must be expecting these trends to improve because the stock has gained 81% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
On a final note, we found 2 warning signs for WH Group (1 is a bit unpleasant) you should be aware of.
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