Here's What's Concerning About Kin Yat Holdings' (HKG:638) Returns On Capital

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Basically the company is earning less on its investments and it is also reducing its total assets. In light of that, from a first glance at Kin Yat Holdings (HKG:638), we've spotted some signs that it could be struggling, so let's investigate.

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. Analysts use this formula to calculate it for Kin Yat Holdings:

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

0.0025 = HK$3.1m ÷ (HK$2.1b - HK$837m) (Based on the trailing twelve months to March 2023).

Therefore, Kin Yat Holdings has an ROCE of 0.2%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 8.3%.

View our latest analysis for Kin Yat Holdings

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

What Can We Tell From Kin Yat Holdings' ROCE Trend?

We are a bit anxious about the trends of ROCE at Kin Yat Holdings. To be more specific, today's ROCE was 4.9% five years ago but has since fallen to 0.2%. On top of that, the business is utilizing 21% less capital within its operations. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

What We Can Learn From Kin Yat Holdings' ROCE

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. Unsurprisingly then, the stock has dived 83% over the last five years, so investors are recognizing these changes and don't like the company's prospects. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Kin Yat Holdings does have some risks, we noticed 2 warning signs (and 1 which is a bit concerning) we think you should know about.

While Kin Yat Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.