If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Speaking of which, we noticed some great changes in Wasion Holdings' (HKG:3393) returns on capital, so let's have a look.
Understanding 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 Wasion Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = CN¥689m ÷ (CN¥13b - CN¥6.5b) (Based on the trailing twelve months to June 2023).
Thus, Wasion Holdings has an ROCE of 10%. In absolute terms, that's a satisfactory return, but compared to the Electronic industry average of 7.7% it's much better.
See our latest analysis for Wasion Holdings
In the above chart we have measured Wasion Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
So How Is Wasion Holdings' ROCE Trending?
Investors would be pleased with what's happening at Wasion Holdings. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 10%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 40%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
On a side note, Wasion Holdings' current liabilities are still rather high at 49% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
In Conclusion...
All in all, it's terrific to see that Wasion Holdings is reaping the rewards from prior investments and is growing its capital base. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 47% return over the last five years. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
One more thing, we've spotted 1 warning sign facing Wasion Holdings that you might find interesting.
While Wasion 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.
