K W Nelson Interior Design and Contracting Group (HKG:8411) Will Want To Turn Around Its Return Trends

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at K W Nelson Interior Design and Contracting Group (HKG:8411) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 K W Nelson Interior Design and Contracting Group, this is the formula:

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

0.08 = HK$11m ÷ (HK$158m - HK$15m) (Based on the trailing twelve months to March 2021).

So, K W Nelson Interior Design and Contracting Group has an ROCE of 8.0%. In absolute terms, that's a low return but it's around the Consumer Services industry average of 7.3%.

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.

How Are Returns Trending?

When we looked at the ROCE trend at K W Nelson Interior Design and Contracting Group, we didn't gain much confidence. To be more specific, ROCE has fallen from 27% over the last five years. 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.

In Conclusion...

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 14% 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.

On a final note, we've found 2 warning signs for K W Nelson Interior Design and Contracting Group that we think you should be aware of.

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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