Here's What To Make Of Kingbo Strike's (HKG:1421) Returns On Capital

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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Kingbo Strike (HKG:1421) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on Kingbo Strike is:

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

0.026 = HK$9.4m ÷ (HK$417m - HK$47m) (Based on the trailing twelve months to December 2020).

Thus, Kingbo Strike has an ROCE of 2.6%. Ultimately, that's a low return and it under-performs the Electrical industry average of 8.7%.

Check out our latest analysis for Kingbo Strike

Historical performance is a great place to start when researching a stock so above you can see the gauge for Kingbo Strike's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Kingbo Strike, check out these free graphs here.

So How Is Kingbo Strike's ROCE Trending?

When we looked at the ROCE trend at Kingbo Strike, we didn't gain much confidence. Around five years ago the returns on capital were 9.7%, but since then they've fallen to 2.6%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From Kingbo Strike's ROCE

While returns have fallen for Kingbo Strike in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. But since the stock has dived 98% in the last five years, there could be other drivers that are influencing the business' outlook. Therefore, we'd suggest researching the stock further to uncover more about the business.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Kingbo Strike (of which 1 is potentially serious!) that you should know about.

While Kingbo Strike may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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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