Returns On Capital At China Wan Tong Yuan (Holdings) (HKG:6966) Paint A Concerning Picture

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at China Wan Tong Yuan (Holdings) (HKG:6966), it didn't seem to tick all of these boxes.

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. To calculate this metric for China Wan Tong Yuan (Holdings), this is the formula:

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

0.085 = CN¥26m ÷ (CN¥319m - CN¥16m) (Based on the trailing twelve months to June 2023).

Therefore, China Wan Tong Yuan (Holdings) has an ROCE of 8.5%. In absolute terms, that's a low return and it also under-performs the Consumer Services industry average of 11%.

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'd like to look at how China Wan Tong Yuan (Holdings) has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

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

In terms of China Wan Tong Yuan (Holdings)'s historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 15% 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 5.1% of total assets. That could partly explain why the ROCE has dropped. 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.

What We Can Learn From 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. These trends are starting to be recognized by investors since the stock has delivered a 39% gain to shareholders who've held over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

If you want to continue researching China Wan Tong Yuan (Holdings), you might be interested to know about the 1 warning sign that our analysis has discovered.

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. 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.