Our Take On The Returns On Capital At China Wan Tong Yuan (Holdings) (HKG:6966)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. However, after briefly looking over the numbers, we don't think China Wan Tong Yuan (Holdings) (HKG:6966) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What is it?

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 China Wan Tong Yuan (Holdings) is:

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

0.14 = CN¥32m ÷ (CN¥245m - CN¥21m) (Based on the trailing twelve months to June 2020).

Therefore, China Wan Tong Yuan (Holdings) has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Consumer Services industry average of 9.3% it's much better.

See 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.

What Does the ROCE Trend For China Wan Tong Yuan (Holdings) Tell Us?

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 four years. 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. 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 8.6% 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.

Our Take On China Wan Tong Yuan (Holdings)'s ROCE

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. And the stock has followed suit returning a meaningful 100% to shareholders over the last three years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

On a final note, we've found 2 warning signs for China Wan Tong Yuan (Holdings) that we think you should be aware of.

While China Wan Tong Yuan (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. 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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