Return Trends At TS Wonders Holding (HKG:1767) Aren't Appealing

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. So, when we ran our eye over TS Wonders Holding's (HKG:1767) trend of ROCE, we liked 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. The formula for this calculation on TS Wonders Holding is:

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

0.13 = S$8.3m ÷ (S$72m - S$9.7m) (Based on the trailing twelve months to December 2020).

So, TS Wonders Holding has an ROCE of 13%. By itself that's a normal return on capital and it's in line with the industry's average returns of 13%.

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're interested in investigating TS Wonders Holding's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is TS Wonders Holding's ROCE Trending?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has consistently earned 13% for the last five years, and the capital employed within the business has risen 120% in that time. Since 13% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 14% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.

What We Can Learn From TS Wonders Holding's ROCE

To sum it up, TS Wonders Holding has simply been reinvesting capital steadily, at those decent rates of return. And since the stock has risen strongly over the last year, it appears the market might expect this trend to continue. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

TS Wonders Holding does have some risks though, and we've spotted 1 warning sign for TS Wonders Holding that you might be interested in.

While TS Wonders Holding 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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