Is K W Nelson Interior Design and Contracting Group (HKG:8411) Likely To Turn Things Around?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 K W Nelson Interior Design and Contracting Group (HKG:8411), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on K W Nelson Interior Design and Contracting Group is:

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

0.16 = HK$22m ÷ (HK$164m - HK$23m) (Based on the trailing twelve months to September 2020).

Thus, K W Nelson Interior Design and Contracting Group has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 9.0% generated by the Consumer Services industry.

View our latest analysis for K W Nelson Interior Design and Contracting Group

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

So How Is K W Nelson Interior Design and Contracting Group's ROCE Trending?

When we looked at the ROCE trend at K W Nelson Interior Design and Contracting Group, we didn't gain much confidence. Around five years ago the returns on capital were 50%, but since then they've fallen to 16%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Bottom Line

In summary, we're somewhat concerned by K W Nelson Interior Design and Contracting Group's diminishing returns on increasing amounts of capital. Long term shareholders who've owned the stock over the last three years have experienced a 30% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing, we've spotted 2 warning signs facing K W Nelson Interior Design and Contracting Group that you might find interesting.

While K W Nelson Interior Design and Contracting Group 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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