Kinergy (HKG:3302) Might Be Having Difficulty Using Its Capital Effectively

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after briefly looking over the numbers, we don't think Kinergy (HKG:3302) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Kinergy, this is the formula:

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

0.014 = S$1.7m ÷ (S$175m - S$54m) (Based on the trailing twelve months to June 2021).

So, Kinergy has an ROCE of 1.4%. Ultimately, that's a low return and it under-performs the Electronic industry average of 7.9%.

See our latest analysis for Kinergy

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Kinergy, check out these free graphs here.

How Are Returns Trending?

The trend of ROCE doesn't look fantastic because it's fallen from 17% five years ago, while the business's capital employed increased by 93%. That being said, Kinergy raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Kinergy probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Kinergy is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 16% over the last three years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Kinergy does come with some risks though, we found 5 warning signs in our investment analysis, and 2 of those shouldn't be ignored...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.