Be Wary Of TS Wonders Holding (HKG:1767) And Its Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Having said that, from a first glance at TS Wonders Holding (HKG:1767) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for TS Wonders Holding, this is the formula:

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

0.12 = S$7.8m ÷ (S$72m - S$6.6m) (Based on the trailing twelve months to June 2021).

So, TS Wonders Holding has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Food industry average of 9.8% it's much better.

See our latest analysis for TS Wonders Holding

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

The Trend Of ROCE

When we looked at the ROCE trend at TS Wonders Holding, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 12% from 19% five years ago. However it looks like TS Wonders Holding might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, TS Wonders Holding has done well to pay down its current liabilities to 9.1% 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 TS Wonders Holding's ROCE

Bringing it all together, while we're somewhat encouraged by TS Wonders Holding's reinvestment in its own business, we're aware that returns are shrinking. And in the last year, the stock has given away 28% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you'd like to know about the risks facing TS Wonders Holding, we've discovered 1 warning sign that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.