Here's What Man Wah Holdings' (HKG:1999) Strong Returns On Capital Mean

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. Ergo, when we looked at the ROCE trends at Man Wah Holdings (HKG:1999), we liked what we saw.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for Man Wah Holdings, this is the formula:

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

0.20 = HK$2.6b ÷ (HK$20b - HK$6.8b) (Based on the trailing twelve months to March 2023).

Thus, Man Wah Holdings has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Consumer Durables industry average of 6.7%.

See our latest analysis for Man Wah Holdings

In the above chart we have measured Man Wah Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

We'd be pretty happy with returns on capital like Man Wah Holdings. The company has consistently earned 20% for the last five years, and the capital employed within the business has risen 97% in that time. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. You'll see this when looking at well operated businesses or favorable business models.

In Conclusion...

In short, we'd argue Man Wah Holdings has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. In light of this, the stock has only gained 40% over the last five years for shareholders who have owned the stock in this period. So to determine if Man Wah Holdings is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

Like most companies, Man Wah Holdings does come with some risks, and we've found 1 warning sign that you should be aware of.

Man Wah Holdings is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.