If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Wong Fong Industries (Catalist:1A1) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Wong Fong Industries, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.057 = S$4.0m ÷ (S$93m - S$22m) (Based on the trailing twelve months to December 2022).
Thus, Wong Fong Industries has an ROCE of 5.7%. Even though it's in line with the industry average of 6.4%, it's still a low return by itself.
View our latest analysis for Wong Fong Industries
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 Wong Fong Industries, check out these free graphs here.
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at Wong Fong Industries doesn't inspire confidence. Around five years ago the returns on capital were 8.6%, but since then they've fallen to 5.7%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
Our Take On Wong Fong Industries' ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Wong Fong Industries is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 15% over the last five years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.
Wong Fong Industries does have some risks, we noticed 5 warning signs (and 2 which are significant) we think you should know about.