We Like These Underlying Return On Capital Trends At Wai Kee Holdings (HKG:610)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Wai Kee Holdings' (HKG:610) returns on capital, so let's have a look.

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. Analysts use this formula to calculate it for Wai Kee Holdings:

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

0.034 = HK$427m ÷ (HK$18b - HK$5.1b) (Based on the trailing twelve months to June 2022).

So, Wai Kee Holdings has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the Construction industry average of 7.3%.

Check out the opportunities and risks within the HK Construction industry.

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're interested in investigating Wai Kee Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Wai Kee Holdings' ROCE Trend?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. Over the last five years, returns on capital employed have risen substantially to 3.4%. The amount of capital employed has increased too, by 71%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

What We Can Learn From Wai Kee Holdings' ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Wai Kee Holdings has. Astute investors may have an opportunity here because the stock has declined 27% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

Wai Kee Holdings does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is concerning...

While Wai Kee 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.