Will The ROCE Trend At Wah Hong Industrial (GTSM:8240) Continue?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Wah Hong Industrial (GTSM:8240) looks quite promising in regards to its trends of return on capital.

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. To calculate this metric for Wah Hong Industrial, this is the formula:

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).

So, 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 10%.

View our latest analysis for Wah Hong Industrial

In the above chart we have measured Wah Hong Industrial's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Wah Hong Industrial.

What The Trend Of ROCE Can Tell Us

You'd find it hard not to be impressed with the ROCE trend at Wah Hong Industrial. We found that the returns on capital employed over the last five years have risen by 609%. The company is now earning NT$0.07 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 25% less capital than it was five years ago. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 45% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

The Bottom Line On Wah Hong Industrial's ROCE

In the end, Wah Hong Industrial has proven it's capital allocation skills are good with those higher returns from less amount of capital. And a remarkable 108% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On a separate note, we've found 3 warning signs for Wah Hong Industrial you'll probably want to know about.

While Wah Hong Industrial 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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