Kingboard Laminates Holdings (HKG:1888) Could Be Struggling To Allocate Capital

What financial metrics can indicate to us that a company is maturing or even in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. And from a first read, things don't look too good at Kingboard Laminates Holdings (HKG:1888), so let's see why.

Understanding Return On Capital Employed (ROCE)

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

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

0.081 = HK$1.5b ÷ (HK$24b - HK$5.6b) (Based on the trailing twelve months to December 2023).

Therefore, Kingboard Laminates Holdings has an ROCE of 8.1%. Even though it's in line with the industry average of 7.5%, it's still a low return by itself.

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'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Kingboard Laminates Holdings .

The Trend Of ROCE

The trend of ROCE at Kingboard Laminates Holdings is showing some signs of weakness. The company used to generate 20% on its capital five years ago but it has since fallen noticeably. On top of that, the business is utilizing 21% less capital within its operations. 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.

In Conclusion...

To see Kingboard Laminates Holdings reducing the capital employed in the business in tandem with diminishing returns, is concerning. Since the stock has skyrocketed 132% over the last five years, it looks like investors have high expectations of the stock. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Kingboard Laminates Holdings does have some risks though, and we've spotted 1 warning sign for Kingboard Laminates Holdings that you might be interested in.

While Kingboard Laminates Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.

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