The Return Trends At King Fook Holdings (HKG:280) Look Promising

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. So on that note, King Fook Holdings (HKG:280) looks quite promising in regards to its trends of return on capital.

What Is 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. 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)

0.11 = HK$86m ÷ (HK$854m - HK$75m) (Based on the trailing twelve months to March 2023).

Thus, King Fook Holdings has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 9.0% generated by the Specialty Retail industry.

View 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 want to delve into the historical earnings, revenue and cash flow of King Fook Holdings, check out these free graphs here.

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

We're delighted to see that King Fook Holdings is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 11% which is a sight for sore eyes. Not only that, but the company is utilizing 23% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

The Key Takeaway

To the delight of most shareholders, King Fook Holdings has now broken into profitability. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 54% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.

King Fook Holdings does have some risks though, and we've spotted 3 warning signs for King Fook Holdings that you might be interested in.

While King Fook 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.