Kinetix Systems Holdings' (HKG:8606) Returns On Capital Not Reflecting Well On The Business

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Kinetix Systems Holdings (HKG:8606), it didn't seem to tick all of these boxes.

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 Kinetix Systems Holdings, this is the formula:

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

0.037 = HK$3.8m ÷ (HK$187m - HK$85m) (Based on the trailing twelve months to March 2021).

So, Kinetix Systems Holdings has an ROCE of 3.7%. In absolute terms, that's a low return and it also under-performs the IT industry average of 7.6%.

See our latest analysis for Kinetix Systems Holdings

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Kinetix Systems Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Kinetix Systems Holdings Tell Us?

In terms of Kinetix Systems Holdings' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 58% over the last five years. However it looks like Kinetix Systems Holdings might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Kinetix Systems Holdings' current liabilities are still rather high at 45% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Kinetix Systems Holdings' reinvestment in its own business, we're aware that returns are shrinking. Yet to long term shareholders the stock has gifted them an incredible 963% return in the last year, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

On a final note, we found 5 warning signs for Kinetix Systems Holdings (1 is concerning) you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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