Has Wisdom Education International Holdings (HKG:6068) Got What It Takes To Become A Multi-Bagger?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Wisdom Education International Holdings (HKG:6068) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Wisdom Education International Holdings, this is the formula:

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

0.095 = CN¥591m ÷ (CN¥7.9b - CN¥1.7b) (Based on the trailing twelve months to August 2020).

So, Wisdom Education International Holdings has an ROCE of 9.5%. On its own that's a low return on capital but it's in line with the industry's average returns of 9.0%.

Check out our latest analysis for Wisdom Education International Holdings

Above you can see how the current ROCE for Wisdom Education International Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Wisdom Education International Holdings here for free.

What Does the ROCE Trend For Wisdom Education International Holdings Tell Us?

Unfortunately, the trend isn't great with ROCE falling from 14% five years ago, while capital employed has grown 340%. Usually this isn't ideal, but given Wisdom Education International Holdings conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Wisdom Education International Holdings' earnings and if they change as a result from the capital raise.

On a side note, Wisdom Education International Holdings has done well to pay down its current liabilities to 21% 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.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Wisdom Education International Holdings' reinvestment in its own business, we're aware that returns are shrinking. And in the last three years, the stock has given away 34% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Wisdom Education International Holdings has the makings of a multi-bagger.

Like most companies, Wisdom Education International Holdings does come with some risks, and we've found 4 warning signs that you should be aware of.

While Wisdom Education International Holdings 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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