King's Flair International (Holdings) (HKG:6822) Will Be Looking To Turn Around Its Returns

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. 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. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. On that note, looking into King's Flair International (Holdings) (HKG:6822), we weren't too upbeat about how things were going.

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. To calculate this metric for King's Flair International (Holdings), this is the formula:

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

0.22 = HK$148m ÷ (HK$882m - HK$211m) (Based on the trailing twelve months to December 2020).

Thus, King's Flair International (Holdings) has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Consumer Durables industry average of 15%.

Check out our latest analysis for King's Flair International (Holdings)

Historical performance is a great place to start when researching a stock so above you can see the gauge for King's Flair International (Holdings)'s ROCE against it's prior returns. If you'd like to look at how King's Flair International (Holdings) has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For King's Flair International (Holdings) Tell Us?

We are a bit worried about the trend of returns on capital at King's Flair International (Holdings). To be more specific, the ROCE was 33% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on King's Flair International (Holdings) becoming one if things continue as they have.

In Conclusion...

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 145%. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

King's Flair International (Holdings) does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is significant...

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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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