King Fook Holdings (HKG:280) Might Have The Makings Of A Multi-Bagger

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. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in King Fook Holdings' (HKG:280) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for King Fook Holdings, this is the formula:

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

0.10 = HK$76m ÷ (HK$870m - HK$126m) (Based on the trailing twelve months to September 2022).

Therefore, King Fook Holdings has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 8.2% generated by the Specialty Retail industry.

Check out our latest analysis for King Fook Holdings

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

What Does the ROCE Trend For King Fook Holdings Tell Us?

Shareholders will be relieved that King Fook Holdings has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 10%, which is always encouraging. While returns have increased, the amount of capital employed by King Fook Holdings has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. Because in the end, a business can only get so efficient.

What We Can Learn From King Fook Holdings' ROCE

To bring it all together, King Fook Holdings has done well to increase the returns it's generating from its capital employed. Considering the stock has delivered 0.08% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So with that in mind, we think the stock deserves further research.

On a final note, we've found 2 warning signs for King Fook Holdings that we think you should be aware of.

While King Fook 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.