We Like These Underlying Return On Capital Trends At WLS Holdings (HKG:8021)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at WLS Holdings (HKG:8021) so let's look a bit deeper.

What Is 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 WLS Holdings:

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

0.066 = HK$27m ÷ (HK$576m - HK$175m) (Based on the trailing twelve months to July 2023).

Thus, WLS Holdings has an ROCE of 6.6%. On its own, that's a low figure but it's around the 7.5% average generated by the Construction industry.

See our latest analysis for WLS Holdings

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of WLS Holdings, check out these free graphs here.

The Trend Of ROCE

Like most people, we're pleased that WLS Holdings is now generating some pretax earnings. The company was generating losses five years ago, but now it's turned around, earning 6.6% which is no doubt a relief for some early shareholders. In regards to capital employed, WLS Holdings is using 44% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. WLS Holdings could be selling under-performing assets since the ROCE is improving.

The Key Takeaway

From what we've seen above, WLS Holdings has managed to increase it's returns on capital all the while reducing it's capital base. Given the stock has declined 32% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you'd like to know more about WLS Holdings, we've spotted 3 warning signs, and 1 of them is significant.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.