Slowing Rates Of Return At Kai Yuan Holdings (HKG:1215) Leave Little Room For Excitement

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Kai Yuan Holdings (HKG:1215), we don't think it's current trends fit the mold of a multi-bagger.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Kai Yuan Holdings is:

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

0.015 = HK$32m ÷ (HK$3.7b - HK$1.6b) (Based on the trailing twelve months to December 2023).

Therefore, Kai Yuan Holdings has an ROCE of 1.5%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 6.1%.

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Kai Yuan Holdings.

How Are Returns Trending?

We're a bit concerned with the trends, because the business is applying 24% less capital than it was five years ago and returns on that capital have stayed flat. When a company effectively decreases its assets base, it's not usually a sign to be optimistic on that company. In addition to that, since the ROCE doesn't scream "quality" at 1.5%, it's hard to get excited about these developments.

On a side note, Kai Yuan Holdings' current liabilities are still rather high at 43% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

In summary, Kai Yuan Holdings isn't reinvesting funds back into the business and returns aren't growing. Moreover, since the stock has crumbled 72% over the last five years, it appears investors are expecting the worst. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Kai Yuan Holdings does have some risks, we noticed 3 warning signs (and 1 which is concerning) we think you should know about.

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.