Stock Analysis

WAC Holdings (HKG:8619) Will Want To Turn Around Its Return Trends

SEHK:8619
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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. In light of that, when we looked at WAC Holdings (HKG:8619) 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 WAC Holdings is:

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

0.055 = HK$5.4m ÷ (HK$138m - HK$39m) (Based on the trailing twelve months to June 2023).

Thus, WAC Holdings has an ROCE of 5.5%. Even though it's in line with the industry average of 5.5%, it's still a low return by itself.

See our latest analysis for WAC Holdings

roce
SEHK:8619 Return on Capital Employed August 29th 2023

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're interested in investigating WAC Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

So How Is WAC Holdings' ROCE Trending?

In terms of WAC Holdings' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 46%, but since then they've fallen to 5.5%. 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. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, WAC Holdings has decreased its current liabilities to 28% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From WAC Holdings' ROCE

While returns have fallen for WAC Holdings in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. But since the stock has dived 95% in the last three years, 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.

Like most companies, WAC Holdings does come with some risks, and we've found 2 warning signs that you should be aware of.

While WAC 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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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.