Be Wary Of Kingboard Laminates Holdings (HKG:1888) And Its Returns On Capital

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. Having said that, after a brief look, Kingboard Laminates Holdings (HKG:1888) we aren't filled with optimism, but let's investigate further.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Kingboard Laminates Holdings:

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

0.11 = HK$1.9b ÷ (HK$25b - HK$6.9b) (Based on the trailing twelve months to June 2024).

Thus, Kingboard Laminates Holdings has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Electronic industry average of 7.5% it's much better.

See our latest analysis for Kingboard Laminates Holdings

In the above chart we have measured Kingboard Laminates Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Kingboard Laminates Holdings for free.

What Does the ROCE Trend For Kingboard Laminates Holdings Tell Us?

The trend of returns that Kingboard Laminates Holdings is generating are raising some concerns. To be more specific, today's ROCE was 16% five years ago but has since fallen to 11%. In addition to that, Kingboard Laminates Holdings is now employing 20% less capital than it was five years ago. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. If these underlying trends continue, we wouldn't be too optimistic going forward.

Our Take On Kingboard Laminates Holdings' ROCE

In summary, it's unfortunate that Kingboard Laminates Holdings is shrinking its capital base and also generating lower returns. Despite the concerning underlying trends, the stock has actually gained 36% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

If you'd like to know about the risks facing Kingboard Laminates Holdings, we've discovered 1 warning sign 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.