Returns On Capital Are Showing Encouraging Signs At Kingworld Medicines Group (HKG:1110)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Kingworld Medicines Group (HKG:1110) so let's look a bit deeper.

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 Kingworld Medicines Group is:

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

0.098 = CN¥68m ÷ (CN¥1.3b - CN¥648m) (Based on the trailing twelve months to June 2020).

So, Kingworld Medicines Group has an ROCE of 9.8%. On its own, that's a low figure but it's around the 9.3% average generated by the Healthcare industry.

Check out our latest analysis for Kingworld Medicines 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'd like to look at how Kingworld Medicines Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Kingworld Medicines Group's ROCE Trend?

Kingworld Medicines Group's ROCE growth is quite impressive. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 26% over the last five years. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

On a side note, Kingworld Medicines Group's current liabilities are still rather high at 48% 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Kingworld Medicines Group's ROCE

In summary, we're delighted to see that Kingworld Medicines Group has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Astute investors may have an opportunity here because the stock has declined 34% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 5 warning signs for Kingworld Medicines Group (of which 1 is potentially serious!) that you should know about.

While Kingworld Medicines 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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