If you’re looking for a multi-bagger, there are a few things to watch out for. A common approach is to try to find a company with Return on capital employed (ROCE) which is increasing, in line with growth amount capital employed. Ultimately, this demonstrates that this is a company that reinvests its earnings at increasing rates of return. With this in mind, we have noticed some promising trends in Wanjia Group Holdings (HKG:401) so let’s look a little deeper.
Understanding return on capital employed (ROCE)
If you’ve never worked with ROCE before, it measures the “yield” (pre-tax profit) a company generates from the capital used in its business. To calculate this metric for Wanjia Group Holdings, here is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.015 = HK$2.9 million ÷ (HK$228 million – HK$34 million) (Based on the last twelve months to September 2021).
So, Wanjia Group Holdings has a ROCE of 1.5%. In absolute terms, this is a weak performance and it is also below the healthcare industry average of 12%.
Check out our latest analysis for Wanjia Group Holdings
Although the past is not indicative of the future, it can be useful to know the historical performance of a company, which is why we have this graph above. If you want to further investigate Wanjia Group Holdings’ past, check out this free chart of past profits, revenue and cash flow.
What can we say about the ROCE trend of Wanjia Group Holdings?
It’s great to see that Wanjia Group Holdings has started generating pre-tax profits from past investments. Although the company is now profitable, it suffered losses on the capital invested five years ago. On the face of it, it looks like the business is becoming more efficient at generating returns, as over the same period the amount of capital employed has decreased by 44%. This could potentially mean that the company sells some of its assets.
One last thing to note, Wanjia Group Holdings reduced current liabilities to 15% of total assets during this period, which effectively reduces the amount of financing from suppliers or short-term creditors. So this improvement in ROCE comes from the underlying economics of the business, which is great to see.
Ultimately, Wanjia Group Holdings has proven that its capital allocation skills are good with these higher returns with less capital. Although the company may face problems elsewhere as the stock has plunged 89% in the past five years. Either way, we believe the underlying fundamentals warrant this stock being investigated further.
One more thing we spotted 2 warning signs deal with Wanjia Group Holdings which might be of interest to you.
If you want to look for strong companies with excellent earnings, check out this free list of companies with strong balance sheets and impressive returns on equity.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.