Investors Will Want KangLi International Holdings' (HKG:6890) Growth In ROCE To Persist

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. With that in mind, we've noticed some promising trends at KangLi International Holdings (HKG:6890) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on KangLi International Holdings is:

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

0.19 = CN¥165m ÷ (CN¥1.9b - CN¥980m) (Based on the trailing twelve months to June 2024).

Thus, KangLi International Holdings has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 10% generated by the Metals and Mining industry.

View our latest analysis for KangLi International 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're interested in investigating KangLi International Holdings' past further, check out this free graph covering KangLi International Holdings' past earnings, revenue and cash flow.

What Does the ROCE Trend For KangLi International Holdings Tell Us?

The trends we've noticed at KangLi International Holdings are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 19%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 34%. So we're very much inspired by what we're seeing at KangLi International Holdings thanks to its ability to profitably reinvest capital.

On a side note, KangLi International Holdings' current liabilities are still rather high at 53% 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.

Our Take On KangLi International Holdings' ROCE

In summary, it's great to see that KangLi International Holdings can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Astute investors may have an opportunity here because the stock has declined 53% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.

Like most companies, KangLi International Holdings does come with some risks, and we've found 1 warning sign that you should be aware of.

While KangLi International Holdings 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.