If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Having said that, from a first glance at Wing Fung Group Asia (HKG:8526) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper 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 Wing Fung Group Asia:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = HK$19m ÷ (HK$167m - HK$63m) (Based on the trailing twelve months to September 2020).
Therefore, Wing Fung Group Asia has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Construction industry average of 10% it's much better.
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're interested in investigating Wing Fung Group Asia's past further, check out this free graph of past earnings, revenue and cash flow.
What Can We Tell From Wing Fung Group Asia's ROCE Trend?
In terms of Wing Fung Group Asia's historical ROCE movements, the trend isn't fantastic. Around four years ago the returns on capital were 43%, but since then they've fallen to 18%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.On a side note, Wing Fung Group Asia has done well to pay down its current liabilities to 37% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
Our Take On Wing Fung Group Asia's ROCE
In summary, Wing Fung Group Asia is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has gained an impressive 43% over the last year, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
Wing Fung Group Asia does have some risks though, and we've spotted 2 warning signs for Wing Fung Group Asia that you might be interested in.
While Wing Fung Group Asia 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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