Will the Promising Trends At Wai Kee Holdings (HKG:610) Continue?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Wai Kee Holdings (HKG:610) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed 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)

0.035 = HK$338m ÷ (HK$14b - HK$4.0b) (Based on the trailing twelve months to June 2020).

Therefore, Wai Kee Holdings has an ROCE of 3.5%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 10%.

Check out 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'd like to look at how Wai Kee Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 3.5%. Basically the business is earning more per dollar of capital invested and in addition to that, 64% more capital is being employed now too. So we're very much inspired by what we're seeing at Wai Kee Holdings thanks to its ability to profitably reinvest capital.

What We Can Learn From Wai Kee Holdings' ROCE

To sum it up, Wai Kee Holdings has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 135% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Wai Kee Holdings can keep these trends up, it could have a bright future ahead.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Wai Kee Holdings (of which 1 shouldn't be ignored!) that you should know about.

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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