We're Watching These Trends At Kelfred Holdings (HKG:1134)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Kelfred Holdings (HKG:1134), it didn't seem to tick all of these boxes.

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)

0.0052 = HK$956k ÷ (HK$270m - HK$85m) (Based on the trailing twelve months to June 2020).

Thus, Kelfred Holdings has an ROCE of 0.5%. Ultimately, that's a low return and it under-performs the Medical Equipment industry average of 10%.

Check out our latest analysis for Kelfred Holdings

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 Kelfred Holdings has performed in the past in other metrics, you can view 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. Around three years ago the returns on capital were 37%, but since then they've fallen to 0.5%. 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.

On a side note, Kelfred Holdings has done well to pay down its current liabilities to 32% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

From the above analysis, we find it rather worrisome that returns on capital and sales for Kelfred Holdings have fallen, meanwhile the business is employing more capital than it was three years ago. Yet despite these poor fundamentals, the stock has gained a huge 158% over the last year, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Kelfred Holdings (of which 1 is concerning!) that you should know about.

While Kelfred Holdings 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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