We Like These Underlying Return On Capital Trends 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? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Kingworld Medicines Group (HKG:1110) looks quite promising in regards to its trends of return on capital.

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. To calculate this metric for Kingworld Medicines Group, this is the formula:

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

0.096 = CN¥67m ÷ (CN¥1.3b - CN¥556m) (Based on the trailing twelve months to December 2020).

So, Kingworld Medicines Group has an ROCE of 9.6%. In absolute terms, that's a low return but it's around the Healthcare industry average of 9.3%.

View our latest analysis for Kingworld Medicines Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Kingworld Medicines Group's ROCE against it's prior returns. If you're interested in investigating Kingworld Medicines Group's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Kingworld Medicines Group Tell Us?

Kingworld Medicines Group has not disappointed with their ROCE growth. 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 29% over the last five years. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 44% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

The Bottom Line

As discussed above, Kingworld Medicines Group appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Given the stock has declined 25% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

Kingworld Medicines Group does have some risks, we noticed 4 warning signs (and 1 which is a bit unpleasant) we think you should know about.

While Kingworld Medicines 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. 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.
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