Returns On Capital Are Showing Encouraging Signs At Kingdom Holdings (HKG:528)

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Kingdom Holdings (HKG:528) so let's look a bit deeper.

Return On Capital Employed (ROCE): What Is It?

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 Kingdom Holdings is:

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

0.15 = CN¥227m ÷ (CN¥3.0b - CN¥1.5b) (Based on the trailing twelve months to June 2022).

So, Kingdom Holdings has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 11% generated by the Luxury industry.

See our latest analysis for Kingdom Holdings

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

What Can We Tell From Kingdom Holdings' ROCE Trend?

We like the trends that we're seeing from Kingdom Holdings. Over the last five years, returns on capital employed have risen substantially to 15%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 29%. So we're very much inspired by what we're seeing at Kingdom Holdings thanks to its ability to profitably reinvest capital.

On a side note, Kingdom Holdings' current liabilities are still rather high at 51% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Kingdom Holdings' ROCE

In summary, it's great to see that Kingdom Holdings can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 89% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.

On a separate note, we've found 1 warning sign for Kingdom Holdings you'll probably want to 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.