Kai Yuan Holdings (HKG:1215) Could Be At Risk Of Shrinking As A Company

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. 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 Kai Yuan Holdings (HKG:1215), we weren't too upbeat about how things were going.

Return On Capital Employed (ROCE): What Is It?

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 Kai Yuan Holdings, this is the formula:

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

0.003 = HK$11m ÷ (HK$3.7b - HK$105m) (Based on the trailing twelve months to June 2023).

Thus, Kai Yuan Holdings has an ROCE of 0.3%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 4.4%.

See our latest analysis for Kai Yuan Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Kai Yuan Holdings' ROCE against it's prior returns. If you'd like to look at how Kai Yuan 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 Kai Yuan Holdings' ROCE Trending?

There is reason to be cautious about Kai Yuan Holdings, given the returns are trending downwards. To be more specific, the ROCE was 0.5% 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. 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. If these trends continue, we wouldn't expect Kai Yuan Holdings to turn into a multi-bagger.

The Bottom Line On Kai Yuan Holdings' ROCE

In summary, it's unfortunate that Kai Yuan Holdings is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last five years have experienced a 62% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One more thing: We've identified 3 warning signs with Kai Yuan Holdings (at least 1 which shouldn't be ignored) , and understanding these would certainly be useful.

While Kai Yuan 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. 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.