Kader Holdings' (HKG:180) Returns On Capital Not Reflecting Well On The Business

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Kader Holdings (HKG:180) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

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 Kader Holdings, this is the formula:

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

0.0018 = HK$4.0m ÷ (HK$2.9b - HK$599m) (Based on the trailing twelve months to June 2022).

So, Kader Holdings has an ROCE of 0.2%. In absolute terms, that's a low return and it also under-performs the Leisure industry average of 4.2%.

See our latest analysis for Kader Holdings

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

How Are Returns Trending?

When we looked at the ROCE trend at Kader Holdings, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 0.2% from 6.7% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Key Takeaway

From the above analysis, we find it rather worrisome that returns on capital and sales for Kader Holdings have fallen, meanwhile the business is employing more capital than it was five years ago. Investors haven't taken kindly to these developments, since the stock has declined 65% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Kader Holdings does have some risks, we noticed 4 warning signs (and 1 which is significant) we think you should know about.

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.