Kin Pang Holdings (HKG:1722) May Have Issues Allocating Its Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. Although, when we looked at Kin Pang Holdings (HKG:1722), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What is it?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Kin Pang Holdings, this is the formula:

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

0.071 = MO$18m ÷ (MO$373m - MO$114m) (Based on the trailing twelve months to June 2020).

Thus, Kin Pang Holdings has an ROCE of 7.1%. Ultimately, that's a low return and it under-performs the Construction industry average of 10%.

View our latest analysis for Kin Pang Holdings

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

So How Is Kin Pang Holdings' ROCE Trending?

On the surface, the trend of ROCE at Kin Pang Holdings doesn't inspire confidence. Around five years ago the returns on capital were 31%, but since then they've fallen to 7.1%. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, Kin Pang Holdings has decreased its current liabilities to 31% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Kin Pang Holdings' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Kin Pang Holdings. But since the stock has dived 74% in the last three 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 more thing: We've identified 3 warning signs with Kin Pang Holdings (at least 1 which is a bit unpleasant) , and understanding them would certainly be useful.

While Kin Pang Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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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