Wanka Online (HKG:1762) Is Looking To Continue Growing 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. 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 on that note, Wanka Online (HKG:1762) looks quite promising in regards to its trends of return on capital.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from 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)

0.07 = CN¥97m ÷ (CN¥1.7b - CN¥328m) (Based on the trailing twelve months to June 2021).

Thus, Wanka Online has an ROCE of 7.0%. On its own that's a low return on capital but it's in line with the industry's average returns of 7.0%.

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 want to delve into the historical earnings, revenue and cash flow of Wanka Online, check out these free graphs here.

The Trend Of ROCE

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 five years ago, but now it's earning 7.0% which is a sight for sore eyes. Not only that, but the company is utilizing 12,015% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

On a related note, the company's ratio of current liabilities to total assets has decreased to 19%, 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

To the delight of most shareholders, Wanka Online has now broken into profitability. Although the company may be facing some issues elsewhere since the stock has plunged 92% in the last three years. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

Wanka Online does have some risks though, and we've spotted 3 warning signs for Wanka Online that you might be interested in.

While Wanka Online 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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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.