If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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 Kwung's Holdings (HKG:1925) and its ROCE trend, we weren't exactly thrilled.
What is 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. Analysts use this formula to calculate it for Kwung's Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = CN¥46m ÷ (CN¥372m - CN¥58m) (Based on the trailing twelve months to June 2020).
So, Kwung's Holdings has an ROCE of 15%. That's a relatively normal return on capital, and it's around the 16% generated by the Consumer Durables industry.
View our latest analysis for Kwung's Holdings
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 Kwung's Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
In terms of Kwung's Holdings' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 21% over the last five years. However it looks like Kwung's Holdings might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
The Bottom Line On Kwung's Holdings' ROCE
In summary, Kwung's Holdings is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has gained an impressive 26% over the last year, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
One more thing: We've identified 3 warning signs with Kwung's Holdings (at least 1 which is concerning) , and understanding these would certainly be useful.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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About SEHK:1925
Kwung's Aroma Holdings
An investment holding company, designs, manufactures, supplies, and trades in home fragrance, decoration, and other products in the People’s Republic of China and internationally.
Excellent balance sheet with proven track record.