Returns On Capital At Kingboard Laminates Holdings (HKG:1888) Have Stalled

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Kingboard Laminates Holdings (HKG:1888) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is 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)

0.18 = HK$3.4b ÷ (HK$24b - HK$4.7b) (Based on the trailing twelve months to December 2022).

Therefore, Kingboard Laminates Holdings has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 7.6% generated by the Electronic industry.

Check out our latest analysis for Kingboard Laminates Holdings

Above you can see how the current ROCE for Kingboard Laminates Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Kingboard Laminates Holdings here for free.

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

Over the past five years, Kingboard Laminates Holdings' ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect Kingboard Laminates Holdings to be a multi-bagger going forward. This probably explains why Kingboard Laminates Holdings is paying out 45% of its income to shareholders in the form of dividends. Unless businesses have highly compelling growth opportunities, they'll typically return some money to shareholders.

The Key Takeaway

In summary, Kingboard Laminates Holdings isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Since the stock has gained an impressive 44% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

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

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.