Investors Could Be Concerned With China Wan Tong Yuan (Holdings)'s (HKG:6966) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating China Wan Tong Yuan (Holdings) (HKG:6966), we don't think it's current trends fit the mold of a multi-bagger.

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. The formula for this calculation on China Wan Tong Yuan (Holdings) is:

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

0.068 = CN¥19m ÷ (CN¥293m - CN¥19m) (Based on the trailing twelve months to June 2022).

Thus, China Wan Tong Yuan (Holdings) has an ROCE of 6.8%. Ultimately, that's a low return and it under-performs the Consumer Services industry average of 8.9%.

Check out our latest analysis for China Wan Tong Yuan (Holdings)

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

How Are Returns Trending?

On the surface, the trend of ROCE at China Wan Tong Yuan (Holdings) doesn't inspire confidence. To be more specific, ROCE has fallen from 20% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, China Wan Tong Yuan (Holdings) has decreased its current liabilities to 6.4% 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.

In Conclusion...

While returns have fallen for China Wan Tong Yuan (Holdings) in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. Furthermore the stock has climbed 48% over the last five years, it would appear that investors are upbeat about the future. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

If you want to continue researching China Wan Tong Yuan (Holdings), you might be interested to know about the 2 warning signs that our analysis has discovered.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.