Wai Kee Holdings (HKG:610) Has Some Way To Go To Become A Multi-Bagger

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Although, when we looked at Wai Kee Holdings (HKG:610), it didn't seem to tick all of these boxes.

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. The formula for this calculation on Wai Kee Holdings is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.05 = HK$606m ÷ (HK$17b - HK$5.1b) (Based on the trailing twelve months to June 2023).

So, Wai Kee Holdings has an ROCE of 5.0%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 7.5%.

See our latest analysis for Wai Kee Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Wai Kee Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Wai Kee Holdings, check out these free graphs here.

So How Is Wai Kee Holdings' ROCE Trending?

The returns on capital haven't changed much for Wai Kee Holdings in recent years. Over the past five years, ROCE has remained relatively flat at around 5.0% and the business has deployed 41% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Key Takeaway

As we've seen above, Wai Kee Holdings' returns on capital haven't increased but it is reinvesting in the business. Since the stock has declined 63% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Wai Kee Holdings does have some risks though, and we've spotted 1 warning sign for Wai Kee Holdings that you might be interested in.

While Wai Kee Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.