If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Kingbo Strike (HKG:1421), it didn't seem to tick all of these boxes.
What is 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. Analysts use this formula to calculate it for Kingbo Strike:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.026 = HK$9.8m ÷ (HK$417m - HK$47m) (Based on the trailing twelve months to December 2020).
Therefore, 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%.
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'd like to look at how Kingbo Strike has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
So How Is Kingbo Strike's ROCE Trending?
When we looked at the ROCE trend at Kingbo Strike, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 2.6% from 9.7% five years ago. 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.
The Bottom Line On 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 81% in the last five years, there could be other drivers that are influencing the business' outlook. Regardless, reinvestment can pay off in the long run, so we think astute investors may want to look further into this stock.
One final note, you should learn about the 2 warning signs we've spotted with Kingbo Strike (including 1 which is a bit unpleasant) .
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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.
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