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

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? 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. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. On that note, looking into King's Flair International (Holdings) (HKG:6822), we weren't too upbeat about how things were going.

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. Analysts use this formula to calculate it for King's Flair International (Holdings):

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

0.043 = HK$28m ÷ (HK$879m - HK$214m) (Based on the trailing twelve months to June 2023).

So, King's Flair International (Holdings) has an ROCE of 4.3%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 7.7%.

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're interested in investigating King's Flair International (Holdings)'s past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From King's Flair International (Holdings)'s ROCE Trend?

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 22% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. 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.

The Bottom Line

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Long term shareholders who've owned the stock over the last five years have experienced a 20% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you want to know some of the risks facing King's Flair International (Holdings) we've found 4 warning signs (1 can't be ignored!) that you should be aware of before investing here.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.