Returns On Capital At Kingdom Holdings (HKG:528) Paint A Concerning Picture

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Kingdom Holdings (HKG:528) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is 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. Analysts use this formula to calculate it for Kingdom Holdings:

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

0.014 = CN¥18m ÷ (CN¥2.6b - CN¥1.3b) (Based on the trailing twelve months to June 2021).

Thus, Kingdom Holdings has an ROCE of 1.4%. Ultimately, that's a low return and it under-performs the Luxury industry average of 6.7%.

View 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 Does the ROCE Trend For Kingdom Holdings Tell Us?

In terms of Kingdom Holdings' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 11% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Another thing to note, Kingdom Holdings has a high ratio of current liabilities to total assets of 49%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Kingdom Holdings' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Kingdom Holdings is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 37% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

On a final note, we found 3 warning signs for Kingdom Holdings (2 don't sit too well with us) you should be aware of.

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.

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.

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