Why We Like The Returns At Karrie International Holdings (HKG:1050)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. And in light of that, the trends we're seeing at Karrie International Holdings' (HKG:1050) look very promising so lets take a look.

Understanding 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 Karrie International Holdings is:

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).

Therefore, Karrie International Holdings has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Electronic industry average of 7.6%.

View our latest analysis for Karrie International Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Karrie International Holdings' ROCE against it's prior returns. If you're interested in investigating Karrie International Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Karrie International Holdings' ROCE Trend?

We like the trends that we're seeing from Karrie International Holdings. Over the last five years, returns on capital employed have risen substantially to 22%. Basically the business is earning more per dollar of capital invested and in addition to that, 83% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

Another thing to note, Karrie International Holdings has a high ratio of current liabilities to total assets of 41%. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Karrie International Holdings has. And a remarkable 331% total return over the last five years tells us that investors are expecting more good things to come in the future. 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.

Karrie International Holdings does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those are a bit unpleasant...

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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This article by Simply Wall St is general in nature. 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.
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