Returns On Capital Are Showing Encouraging Signs At KangLi International Holdings (HKG:6890)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher 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.

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. 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%. On its own, that's a standard return, however it's much better than the 8.0% generated by the Metals and Mining industry.

Check out our latest analysis for KangLi International Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for KangLi International Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of KangLi International Holdings, check out these free graphs here.

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

Investors would be pleased with what's happening at KangLi International Holdings. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From 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. Given the stock has declined 13% in the last year, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One more thing: We've identified 3 warning signs with KangLi International Holdings (at least 1 which doesn't sit too well with us) , and understanding them would certainly be useful.

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. 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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