KangLi International Holdings (HKG:6890) Is Experiencing Growth In Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, KangLi International Holdings (HKG:6890) looks quite promising in regards to its trends of return on capital.

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. Analysts use this formula to calculate it for KangLi International Holdings:

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

0.15 = CN¥106m ÷ (CN¥1.9b - CN¥1.2b) (Based on the trailing twelve months to December 2020).

Thus, KangLi International Holdings has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Metals and Mining industry average of 8.8% it's much better.

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 of past earnings, revenue and cash flow.

So How Is KangLi International Holdings' ROCE Trending?

The trends we've noticed at KangLi International Holdings are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 15%. The amount of capital employed has increased too, by 84%. 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 separate but related note, it's important to know that KangLi International Holdings has a current liabilities to total assets ratio of 62%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On KangLi International Holdings' ROCE

All in all, it's terrific to see that KangLi International Holdings is reaping the rewards from prior investments and is growing its capital base. And since the stock has fallen 14% over the last year, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you want to know some of the risks facing KangLi International Holdings we've found 5 warning signs (2 are concerning!) that you should be aware of before investing here.

While KangLi International 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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