We Like These Underlying Return On Capital Trends At King Fook Holdings (HKG:280)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. So when we looked at King Fook Holdings (HKG:280) and its trend of ROCE, we really liked what we saw.

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. The formula for this calculation on King Fook Holdings is:

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

0.047 = HK$33m ÷ (HK$821m - HK$111m) (Based on the trailing twelve months to March 2021).

So, King Fook Holdings has an ROCE of 4.7%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 11%.

See 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'd like to look at how King Fook Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From King Fook Holdings' ROCE Trend?

We're delighted to see that King Fook Holdings is reaping rewards from its investments and has now broken into profitability. The company now earns 4.7% on its capital, because five years ago it was incurring losses. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

The Bottom Line On King Fook Holdings' ROCE

As discussed above, King Fook Holdings appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And since the stock has fallen 14% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

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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