Capital Allocation Trends At WAC Holdings (HKG:8619) Aren't Ideal

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Although, when we looked at WAC Holdings (HKG:8619), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for WAC Holdings:

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

0.05 = HK$4.6m ÷ (HK$132m - HK$39m) (Based on the trailing twelve months to September 2023).

So, WAC Holdings has an ROCE of 5.0%. Ultimately, that's a low return and it under-performs the Professional Services industry average of 12%.

See our latest analysis for WAC Holdings

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

What Can We Tell From WAC Holdings' ROCE Trend?

On the surface, the trend of ROCE at WAC Holdings doesn't inspire confidence. Around five years ago the returns on capital were 15%, but since then they've fallen to 5.0%. 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 may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On WAC Holdings' ROCE

In summary, WAC Holdings is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors may be expecting the fundamentals to get a lot worse because the stock has crashed 88% over the last five years. Therefore based on the analysis done in this article, we don't think WAC Holdings has the makings of a multi-bagger.

On a final note, we found 2 warning signs for WAC Holdings (1 can't be ignored) you should be aware of.

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.