Is Wah Wo Holdings Group (HKG:9938) Likely To Turn Things Around?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Wah Wo Holdings Group (HKG:9938) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Wah Wo Holdings Group is:

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

0.16 = HK$39m ÷ (HK$298m - HK$47m) (Based on the trailing twelve months to September 2020).

So, Wah Wo Holdings Group has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 10% generated by the Construction industry.

See our latest analysis for Wah Wo Holdings Group

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

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Wah Wo Holdings Group doesn't inspire confidence. Over the last three years, returns on capital have decreased to 16% from 47% three years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Wah Wo Holdings Group has done well to pay down its current liabilities to 16% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Wah Wo Holdings Group's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Wah Wo Holdings Group is reinvesting for growth and has higher sales as a result. But since the stock has dived 86% in the last year, there could be other drivers that are influencing the business' outlook. Therefore, we'd suggest researching the stock further to uncover more about the business.

One more thing: We've identified 5 warning signs with Wah Wo Holdings Group (at least 1 which doesn't sit too well with us) , and understanding them would certainly be useful.

While Wah Wo Holdings Group 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. 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.
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