To find multi-bagger stock, what are the underlying trends we need to look for in a business? A common approach is to try to find a business with Return on capital employed (ROCE) which increases, in connection with growth amount capital employed. Basically, it means that a business has profitable initiatives that it can keep reinvesting in, which is a hallmark of a dialing machine. That said, from the first glance at Kam Hing International Holdings (HKG: 2307) We’re not jumping from our chairs on the yield trend, but taking a closer look.
Return on capital employed (ROCE): what is it?
For those who don’t know, ROCE is a measure of a company’s annual pre-tax profit (its return), relative to the capital employed in the company. Analysts use this formula to calculate it for Kam Hing International Holdings:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.044 = HK $ 123 million ÷ (HK $ 4.9 billion – HK $ 2.1 billion) (Based on the last twelve months up to June 2021).
So, Kam Hing International Holdings has a ROCE of 4.4%. In absolute terms, this is a low return and it is also below the luxury industry average of 6.7%.
See our latest analysis for Kam Hing International Holdings
Although the past is not representative of the future, it can be useful to know the historical performance of a company, which is why we have this graph above. If you want to delve into the history of Kam Hing International Holdings earnings, income and cash flow, check out these free graphics here.
So what’s the ROCE trend for Kam Hing International Holdings?
Things have been fairly stable at Kam Hing International Holdings, with its capital employed and returns on that capital remaining roughly the same over the past five years. It’s not uncommon to see this when looking at a mature, stable company that isn’t reinvesting its profits because it’s likely past that phase of the business cycle. So don’t be surprised if Kam Hing International Holdings won’t become a multi-bagger in a few years.
On another note, while the trend change in ROCE may not attract attention, it’s worth noting that current liabilities have actually increased over the past five years. This is intriguing because if current liabilities had not increased to 42% of total assets, this reported ROCE would likely be less than 4.4% because total capital employed would be higher. The ROCE of 4.4% could be even lower if current liabilities were not 42% of total assets, as the formula would show a broader base of total capital employed. Moreover, this high level of short-term liabilities is not ideal because it means that the company’s suppliers (or short-term creditors) are effectively financing a large part of the business.
In a nutshell, Kam Hing International Holdings has marketed with the same returns of the same amount of capital over the past five years. And over the past five years, the stock has fallen 14%, so the market doesn’t seem overly bullish that these trends will strengthen anytime soon. Overall, we’re not too inspired by the underlying trends and think there might be a better chance of finding a multi-bagger elsewhere.
One more thing: we have identified 4 warning signs with Kam Hing International Holdings (at least 2 which are a bit disturbing), and understanding them would certainly be helpful.
For those who like to invest in solid companies, Check it out free list of companies with strong balance sheets and high returns on equity.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.
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