Karrie International Holdings (HKG:1050) Is Very Good At Capital Allocation

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at the ROCE trend of Karrie International Holdings (HKG:1050) we really liked what we saw.

Return On Capital Employed (ROCE): What is it?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Karrie International Holdings, this is the formula:

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

0.22 = HK$431m ÷ (HK$3.4b - HK$1.4b) (Based on the trailing twelve months to September 2020).

So, Karrie International Holdings has an ROCE of 22%. That's a fantastic return and not only that, it outpaces the average of 8.5% earned by companies in a similar industry.

View our latest analysis for Karrie International 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 want to delve into the historical earnings, revenue and cash flow of Karrie International Holdings, check out these free graphs here.

So How Is Karrie International Holdings' ROCE Trending?

We like the trends that we're seeing from Karrie International Holdings. The data shows that returns on capital have increased substantially over the last five years to 22%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 83%. So we're very much inspired by what we're seeing at Karrie International Holdings thanks to its ability to profitably reinvest capital.

On a separate but related note, it's important to know that Karrie International Holdings has a current liabilities to total assets ratio of 41%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Karrie International Holdings' ROCE

In summary, it's great to see that Karrie International Holdings can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a staggering 433% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Karrie International Holdings can keep these trends up, it could have a bright future ahead.

One more thing: We've identified 5 warning signs with Karrie International Holdings (at least 2 which are a bit unpleasant) , and understanding them would certainly be useful.

Karrie International Holdings is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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