Here's What's Concerning About Kam Hing International Holdings' (HKG:2307) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Kam Hing International Holdings (HKG:2307), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Kam Hing International Holdings is:

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

0.0069 = HK$23m ÷ (HK$4.5b - HK$1.1b) (Based on the trailing twelve months to June 2022).

Thus, Kam Hing International Holdings has an ROCE of 0.7%. Ultimately, that's a low return and it under-performs the Luxury industry average of 11%.

See our latest analysis for Kam Hing International 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 Kam Hing International 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

On the surface, the trend of ROCE at Kam Hing International Holdings doesn't inspire confidence. To be more specific, ROCE has fallen from 1.9% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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.

On a related note, Kam Hing International Holdings has decreased its current liabilities to 25% of total assets. So we could link some of this to the decrease in ROCE. 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 Key Takeaway

To conclude, we've found that Kam Hing International Holdings is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 49% in the last five years. Therefore based on the analysis done in this article, we don't think Kam Hing International Holdings has the makings of a multi-bagger.

Kam Hing International Holdings does have some risks, we noticed 4 warning signs (and 2 which are potentially serious) we think you should know about.

While Kam Hing International 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. 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.