What Do The Returns At Kasen International Holdings (HKG:496) Mean Going Forward?

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Kasen International Holdings (HKG:496) so let's look a bit deeper.

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. The formula for this calculation on Kasen International Holdings is:

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

0.09 = CN¥358m ÷ (CN¥6.2b - CN¥2.2b) (Based on the trailing twelve months to June 2020).

Therefore, Kasen International Holdings has an ROCE of 9.0%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 12%.

See our latest analysis for Kasen International Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Kasen International Holdings' ROCE against it's prior returns. If you're interested in investigating Kasen International Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

Shareholders will be relieved that Kasen International Holdings has broken into profitability. The company now earns 9.0% on its capital, because five years ago it was incurring losses. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

On a related note, the company's ratio of current liabilities to total assets has decreased to 36%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Kasen International Holdings has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

What We Can Learn From Kasen International Holdings' ROCE

In summary, we're delighted to see that Kasen International Holdings has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And since the stock has fallen 28% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

While Kasen International Holdings looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether 496 is currently trading for a fair price.

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. 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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