Does Lee Kee Holdings Limited (HKG:637)’s Capital Return Make The Cut?

This analysis is intended to introduce important early concepts to people who are starting to invest and looking to gauge the potential return on investment in Lee Kee Holdings Limited (HKG:637).

Buying Lee Kee Holdings makes you a partial owner of the company. As a result, your investment is being put to work to fund operations and if you want to earn an attractive return on your investment, the business needs to be making an adequate amount of money from the funds you provide. You need to pay attention to this because your return on investment is linked to dividends and internal investments to improve the business, which can only occur if the company is expected to produce adequate earnings with the capital that has been provided. Thus, to understand how your money can grow by investing in Lee Kee Holdings, you need to look at what the company returns to owners for the use of their capital, which can be done in many ways but today we will use return on capital employed (ROCE).

See our latest analysis for Lee Kee Holdings

What is Return on Capital Employed (ROCE)?

As an investor you have many alternative companies to choose from, which means there is an opportunity cost in any investment you make in the form of a foregone investment in another company. Accordingly, before you invest you need to assess the capital returns that the company has produced with reference to a certain benchmark to ensure that you are confident in the business’ ability to grow your capital at a level that grants an investment over other companies. To determine Lee Kee Holdings’s capital return we will use ROCE, which tells us how much the company makes from the capital employed in their operations (for things like machinery, wages etc). I have calculated Lee Kee Holdings’s ROCE for you below:

ROCE Calculation for 637

Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)

Capital Employed = (Total Assets – Current Liabilities)

∴ ROCE = HK$90.18m ÷ (HK$1.47b – HK$341.20m) = 7.99%

637’s 7.99% ROCE means that for every HK$100 you invest, the company creates HK$8. Comparing this to a healthy 15% benchmark shows Lee Kee Holdings is currently unable to return a satisfactory amount to owners for the use of their capital, which isn’t good for investors who have forgone other potentially solid companies.

SEHK:637 Last Perf August 17th 18
SEHK:637 Last Perf August 17th 18

Why is this the case?

Although Lee Kee Holdings is in an unfavourable position, you should know that this could change if the company is able to increase earnings on the same capital base or find new efficiencies that require less capital to produce earnings. Because of this, it is important to look beyond the final value of 637’s ROCE and understand what is happening to the individual components. Looking at the past 3 year period shows us that 637 boosted investor return on capital employed from 1.71%. We can see that earnings have increased from HK$20.38m to HK$90.18m whilst the amount of capital employed has declined due to a decreased level of total assets , which means that ROCE has increased as a result of Lee Kee Holdings’s ability to grow earnings in conjunction with increased capital efficiency.

Next Steps

ROCE for 637 investors is below the desired level at the moment, however, the company has triggered an upward trend over the recent past which could signal an opportunity for a solid return on investment in the long term. Before making any decisions, ROCE does not tell the whole picture so you need to pay attention to other fundamentals like future prospects and management ability to determine if an opportunity exists that isn’t made apparent by looking at past data. Lee Kee Holdings’s fundamentals can be explored with the links I’ve provided below if you are interested, otherwise you can start looking at other high-performing stocks.

  1. Future Outlook: What are well-informed industry analysts predicting for 637’s future growth? Take a look at our free research report of analyst consensus for 637’s outlook.
  2. Management:Have insiders been ramping up their shares to take advantage of the market’s sentiment for Lee Kee Holdings’s future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.