Can Wanka Online (HKG:1762) Continue To Grow Its 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? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Wanka Online's (HKG:1762) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for Wanka Online:

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

0.13 = CN¥152m ÷ (CN¥1.6b - CN¥417m) (Based on the trailing twelve months to June 2020).

Thus, Wanka Online has an ROCE of 13%. That's a pretty standard return and it's in line with the industry average of 13%.

View our latest analysis for Wanka Online

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'd like to look at how Wanka Online has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Wanka Online's ROCE Trending?

We're delighted to see that Wanka Online is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses four years ago, but now it's earning 13% which is a sight for sore eyes. In addition to that, Wanka Online is employing 10,016% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

On a related note, the company's ratio of current liabilities to total assets has decreased to 27%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

The Bottom Line

Overall, Wanka Online gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Although the company may be facing some issues elsewhere since the stock has plunged 72% in the last year. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

Like most companies, Wanka Online does come with some risks, and we've found 4 warning signs 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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