The Returns On Capital At Kingboard Holdings (HKG:148) Don't Inspire Confidence

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Basically the company is earning less on its investments and it is also reducing its total assets. On that note, looking into Kingboard Holdings (HKG:148), we weren't too upbeat about how things were going.

Understanding 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 Kingboard Holdings, this is the formula:

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

0.061 = HK$4.7b ÷ (HK$99b - HK$21b) (Based on the trailing twelve months to June 2023).

So, Kingboard Holdings has an ROCE of 6.1%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.1%.

See our latest analysis for Kingboard Holdings

Above you can see how the current ROCE for Kingboard Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Kingboard Holdings.

How Are Returns Trending?

In terms of Kingboard Holdings' historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 9.9%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Kingboard Holdings to turn into a multi-bagger.

The Bottom Line

In summary, it's unfortunate that Kingboard Holdings is generating lower returns from the same amount of capital. In spite of that, the stock has delivered a 20% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Like most companies, Kingboard Holdings does come with some risks, and we've found 2 warning signs that 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.