Returns Are Gaining Momentum At Kin Yat Holdings (HKG:638)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Kin Yat Holdings (HKG:638) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What is it?

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 Kin Yat Holdings is:

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

0.072 = HK$119m ÷ (HK$3.0b - HK$1.4b) (Based on the trailing twelve months to September 2020).

So, Kin Yat Holdings has an ROCE of 7.2%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 13%.

See our latest analysis for Kin Yat 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 Kin Yat Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Kin Yat Holdings' ROCE Trending?

Kin Yat Holdings has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 7.2% on its capital. And unsurprisingly, like most companies trying to break into the black, Kin Yat Holdings is utilizing 34% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

On a separate but related note, it's important to know that Kin Yat Holdings has a current liabilities to total assets ratio of 46%, which we'd consider pretty high. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Kin Yat Holdings' ROCE

In summary, it's great to see that Kin Yat Holdings has managed to break into profitability and is continuing to reinvest in its business. Considering the stock has delivered 7.2% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So with that in mind, we think the stock deserves further research.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Kin Yat Holdings (of which 1 can't be ignored!) that you should know about.

While Kin Yat 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. 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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