Investors Should Be Encouraged By Kingboard Laminates Holdings' (HKG:1888) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. And in light of that, the trends we're seeing at Kingboard Laminates Holdings' (HKG:1888) look very promising so lets take a look.

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. The formula for this calculation on Kingboard Laminates Holdings is:

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

0.24 = HK$3.6b ÷ (HK$26b - HK$12b) (Based on the trailing twelve months to December 2020).

Thus, Kingboard Laminates Holdings has an ROCE of 24%. That's a fantastic return and not only that, it outpaces the average of 8.3% earned by companies in a similar industry.

View 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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Kingboard Laminates Holdings' ROCE Trend?

Kingboard Laminates Holdings has not disappointed with their ROCE growth. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 225% over the last five years. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 44% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

What We Can Learn From Kingboard Laminates Holdings' ROCE

To bring it all together, Kingboard Laminates Holdings has done well to increase the returns it's generating from its capital employed. Since the stock has returned a staggering 555% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One more thing, we've spotted 2 warning signs facing Kingboard Laminates Holdings that you might find interesting.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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