What Can The Trends At Kin Yat Holdings (HKG:638) Tell Us About Their Returns?

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Kin Yat Holdings (HKG:638) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Kin Yat Holdings, this is the formula:

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).

Thus, Kin Yat Holdings has an ROCE of 7.2%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 16%.

See 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're delighted to see that Kin Yat Holdings is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 7.2% which is a sight for sore eyes. In addition to that, Kin Yat Holdings is employing 34% more capital than previously which is expected of a company that's trying to break into profitability. 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 side note, Kin Yat Holdings' current liabilities are still rather high at 46% of total assets. 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 Kin Yat Holdings' ROCE

Long story short, we're delighted to see that Kin Yat Holdings' reinvestment activities have paid off and the company is now profitable. Since the stock has returned a solid 67% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

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 is potentially serious!) that 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. 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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