Wisdom Education International Holdings (HKG:6068) Might Have The Makings Of A Multi-Bagger

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. Speaking of which, we noticed some great changes in Wisdom Education International Holdings' (HKG:6068) returns on capital, so let's have a look.

Understanding 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 Wisdom Education International Holdings is:

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

0.16 = CN¥140m ÷ (CN¥1.4b - CN¥572m) (Based on the trailing twelve months to August 2023).

Therefore, Wisdom Education International Holdings has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Consumer Services industry average of 11% it's much better.

See our latest analysis for Wisdom Education International Holdings

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

What The Trend Of ROCE Can Tell Us

Wisdom Education International Holdings has not disappointed in regards to ROCE growth. The data shows that returns on capital have increased by 103% over the trailing five years. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. In regards to capital employed, Wisdom Education International Holdings appears to been achieving more with less, since the business is using 77% less capital to run its operation. Wisdom Education International Holdings may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

The Key Takeaway

From what we've seen above, Wisdom Education International Holdings has managed to increase it's returns on capital all the while reducing it's capital base. However the stock is down a substantial 87% in the last five years so there could be other areas of the business hurting its prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

If you want to know some of the risks facing Wisdom Education International Holdings we've found 4 warning signs (1 is a bit concerning!) that you should be aware of before investing here.

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.