What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Ergo, when we looked at the ROCE trends at Man Wah Holdings (HKG:1999), we liked what we saw.
What Is Return On Capital Employed (ROCE)?
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 Man Wah Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.21 = HK$2.7b ÷ (HK$20b - HK$7.2b) (Based on the trailing twelve months to September 2023).
So, Man Wah Holdings has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Consumer Durables industry average of 11%.
Above you can see how the current ROCE for Man Wah Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Man Wah Holdings for free.
What The Trend Of ROCE Can Tell Us
Man Wah Holdings deserves to be commended in regards to it's returns. The company has consistently earned 21% for the last five years, and the capital employed within the business has risen 99% in that time. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If Man Wah Holdings can keep this up, we'd be very optimistic about its future.
The Key Takeaway
In summary, we're delighted to see that Man Wah Holdings has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And given the stock has only risen 37% over the last five years, we'd suspect the market is beginning to recognize these trends. So to determine if Man Wah Holdings is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.
Like most companies, Man Wah Holdings does come with some risks, and we've found 1 warning sign that you should be aware of.
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
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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.