Investors Shouldn't Overlook Want Want China Holdings' (HKG:151) Impressive 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? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Want Want China Holdings' (HKG:151) returns on capital, so let's have a look.

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. Analysts use this formula to calculate it for Want Want China Holdings:

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

0.30 = CN¥4.9b ÷ (CN¥27b - CN¥11b) (Based on the trailing twelve months to September 2023).

Thus, Want Want China Holdings has an ROCE of 30%. In absolute terms that's a great return and it's even better than the Food industry average of 9.0%.

See our latest analysis for Want Want China Holdings

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're interested, you can view the analysts predictions in our free analyst report for Want Want China Holdings .

What Does the ROCE Trend For Want Want China Holdings Tell Us?

We're pretty happy with how the ROCE has been trending at Want Want China Holdings. We found that the returns on capital employed over the last five years have risen by 58%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. In regards to capital employed, Want Want China Holdings appears to been achieving more with less, since the business is using 24% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 40% of its operations, which isn't ideal. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

The Key Takeaway

From what we've seen above, Want Want China Holdings has managed to increase it's returns on capital all the while reducing it's capital base. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. So researching this company further and determining whether or not these trends will continue seems justified.

While Want Want China Holdings looks impressive, no company is worth an infinite price. The intrinsic value infographic for 151 helps visualize whether it is currently trading for a fair price.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.