Here's What Want Want China Holdings' (HKG:151) Strong Returns On Capital Mean

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. That's why when we briefly looked at Want Want China Holdings' (HKG:151) ROCE trend, we were very happy with what we saw.

Understanding 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 Want Want China Holdings, this is the formula:

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

0.26 = CN¥5.3b ÷ (CN¥30b - CN¥9.2b) (Based on the trailing twelve months to March 2022).

Thus, Want Want China Holdings has an ROCE of 26%. That's a fantastic return and not only that, it outpaces the average of 8.5% earned by companies in a similar industry.

Our analysis indicates that 151 is potentially undervalued!

In the above chart we have measured Want Want China Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Want Want China Holdings here for free.

How Are Returns Trending?

Want Want China Holdings deserves to be commended in regards to it's returns. The company has employed 26% more capital in the last five years, and the returns on that capital have remained stable at 26%. Now considering ROCE is an attractive 26%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. You'll see this when looking at well operated businesses or favorable business models.

What We Can Learn From Want Want China Holdings' ROCE

Want Want China Holdings has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. However, over the last five years, the stock has only delivered a 2.3% return to shareholders who held over that period. So to determine if Want Want China Holdings is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

Want Want China Holdings does have some risks though, and we've spotted 1 warning sign for Want Want China Holdings that you might be interested in.

Want Want China Holdings is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.