Kidztech Holdings (HKG:6918) May Have Issues Allocating Its Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Kidztech Holdings (HKG:6918), we don't think it's current trends fit the mold of a multi-bagger.

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 Kidztech Holdings is:

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

0.095 = CN¥41m ÷ (CN¥671m - CN¥236m) (Based on the trailing twelve months to December 2020).

Therefore, Kidztech Holdings has an ROCE of 9.5%. On its own that's a low return, but compared to the average of 7.2% generated by the Leisure industry, it's much better.

See our latest analysis for Kidztech Holdings

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

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Kidztech Holdings, we didn't gain much confidence. Around five years ago the returns on capital were 21%, but since then they've fallen to 9.5%. However it looks like Kidztech Holdings might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On Kidztech Holdings' ROCE

Bringing it all together, while we're somewhat encouraged by Kidztech Holdings' reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 86% over the last year, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you'd like to know more about Kidztech Holdings, we've spotted 2 warning signs, and 1 of them is a bit unpleasant.

While Kidztech 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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