There's Been No Shortage Of Growth Recently For Wanjia Group Holdings' (HKG:401) Returns On Capital

By
Simply Wall St
Published
November 23, 2021
SEHK:401
Source: Shutterstock

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Wanjia Group Holdings (HKG:401) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for Wanjia Group Holdings, this is the formula:

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

0.015 = HK$2.9m ÷ (HK$228m - HK$34m) (Based on the trailing twelve months to September 2021).

Thus, Wanjia Group Holdings has an ROCE of 1.5%. In absolute terms, that's a low return and it also under-performs the Healthcare industry average of 11%.

See our latest analysis for Wanjia Group Holdings

roce
SEHK:401 Return on Capital Employed November 23rd 2021

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Wanjia Group Holdings, check out these free graphs here.

How Are Returns Trending?

It's great to see that Wanjia Group Holdings has started to generate some pre-tax earnings from prior investments. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 1.5% on their capital employed. Additionally, the business is utilizing 44% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

One more thing to note, Wanjia Group Holdings has decreased current liabilities to 15% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

In Conclusion...

In the end, Wanjia Group Holdings has proven it's capital allocation skills are good with those higher returns from less amount of capital. Although the company may be facing some issues elsewhere since the stock has plunged 96% in the last five years. Still, it's worth doing some further research to see if the trends will continue into the future.

On a final note, we've found 2 warning signs for Wanjia Group Holdings that we think 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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