The Trends At K W Nelson Interior Design and Contracting Group (HKG:8411) That You Should Know About

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. 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.

Understanding 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. Analysts use this formula to calculate it for K W Nelson Interior Design and Contracting Group:

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).

Therefore, 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 9.3% generated by the Consumer Services industry.

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

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating K W Nelson Interior Design and Contracting Group's past further, check out this free graph of past earnings, revenue and cash flow.

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

In terms of K W Nelson Interior Design and Contracting Group's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 16% from 50% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line

From the above analysis, we find it rather worrisome that returns on capital and sales for K W Nelson Interior Design and Contracting Group have fallen, meanwhile the business is employing more capital than it was five years ago. And long term shareholders have watched their investments stay flat over the last three years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you'd like to know about the risks facing K W Nelson Interior Design and Contracting Group, we've discovered 2 warning signs that you should be aware of.

While K W Nelson Interior Design and Contracting Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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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