Kantone Holdings (HKG:1059) Is Doing The Right Things To Multiply Its Share Price

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Kantone Holdings' (HKG:1059) returns on capital, so let's have a look.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Kantone Holdings, this is the formula:

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

0.012 = HK$1.5m ÷ (HK$191m - HK$61m) (Based on the trailing twelve months to December 2022).

Thus, Kantone Holdings has an ROCE of 1.2%. Ultimately, that's a low return and it under-performs the Software industry average of 6.8%.

Check out our latest analysis for Kantone Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Kantone Holdings' ROCE against it's prior returns. If you'd like to look at how Kantone Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

We're delighted to see that Kantone Holdings is reaping rewards from its investments and has now broken into profitability. The company now earns 1.2% on its capital, because five years ago it was incurring losses. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

Our Take On Kantone Holdings' ROCE

To sum it up, Kantone Holdings is collecting higher returns from the same amount of capital, and that's impressive. Astute investors may have an opportunity here because the stock has declined 49% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Kantone Holdings (of which 1 is significant!) that you should know about.

While Kantone 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.