Returns Are Gaining Momentum At Kantone Holdings (HKG:1059)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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, Kantone Holdings (HKG:1059) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What Is It?

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 Kantone Holdings, this is the formula:

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

0.069 = HK$12m ÷ (HK$242m - HK$74m) (Based on the trailing twelve months to June 2024).

Thus, Kantone Holdings has an ROCE of 6.9%. On its own, that's a low figure but it's around the 6.2% average generated by the Software industry.

View 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're interested in investigating Kantone Holdings' past further, check out this free graph covering Kantone Holdings' past earnings, revenue and cash flow.

So How Is Kantone Holdings' ROCE Trending?

Kantone Holdings has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 6.9% on its capital. In addition to that, Kantone Holdings is employing 82% more capital than previously which is expected of a company that's 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.

On a related note, the company's ratio of current liabilities to total assets has decreased to 30%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

Our Take On Kantone Holdings' ROCE

Long story short, we're delighted to see that Kantone Holdings' reinvestment activities have paid off and the company is now profitable. Given the stock has declined 15% in the last five years, 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.

On a final note, we found 4 warning signs for Kantone Holdings (1 is potentially serious) you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.