Wah Hong Industrial (GTSM:8240) Is Looking To Continue Growing Its Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Wah Hong Industrial (GTSM:8240) and its trend of ROCE, we really liked what we saw.

Understanding 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. The formula for this calculation on Wah Hong Industrial is:

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

0.066 = NT$315m ÷ (NT$8.7b - NT$3.9b) (Based on the trailing twelve months to September 2020).

Thus, Wah Hong Industrial has an ROCE of 6.6%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 11%.

View our latest analysis for Wah Hong Industrial

Historical performance is a great place to start when researching a stock so above you can see the gauge for Wah Hong Industrial's ROCE against it's prior returns. If you'd like to look at how Wah Hong Industrial has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Wah Hong Industrial's ROCE Trending?

We're pretty happy with how the ROCE has been trending at Wah Hong Industrial. The figures show that over the last five years, returns on capital have grown by 609%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. In regards to capital employed, Wah Hong Industrial appears to been achieving more with less, since the business is using 25% less capital to run its operation. Wah Hong Industrial may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 45% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

The Bottom Line

From what we've seen above, Wah Hong Industrial has managed to increase it's returns on capital all the while reducing it's capital base. And a remarkable 105% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing, we've spotted 2 warning signs facing Wah Hong Industrial that you might find interesting.

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. 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.
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