Here's What's Concerning About Kelfred Holdings' (HKG:1134) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Kelfred Holdings (HKG:1134) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for Kelfred Holdings, this is the formula:

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

0.04 = HK$7.5m ÷ (HK$252m - HK$64m) (Based on the trailing twelve months to December 2022).

So, Kelfred Holdings has an ROCE of 4.0%. Ultimately, that's a low return and it under-performs the Medical Equipment industry average of 9.6%.

Check out our latest analysis for Kelfred Holdings

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

What Does the ROCE Trend For Kelfred Holdings Tell Us?

On the surface, the trend of ROCE at Kelfred Holdings doesn't inspire confidence. Over the last five years, returns on capital have decreased to 4.0% from 29% five years ago. However it looks like Kelfred Holdings might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Kelfred Holdings has decreased its current liabilities to 26% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On Kelfred Holdings' ROCE

To conclude, we've found that Kelfred Holdings is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 28% in the last three years. Therefore based on the analysis done in this article, we don't think Kelfred Holdings has the makings of a multi-bagger.

If you want to know some of the risks facing Kelfred Holdings we've found 3 warning signs (1 is a bit concerning!) that you should be aware of before investing here.

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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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.