Does Wong's Kong King International (Holdings)'s (HKG:532) Returns On Capital Reflect Well On The Business?

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. On that note, looking into Wong's Kong King International (Holdings) (HKG:532), we weren't too upbeat about how things were going.

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. Analysts use this formula to calculate it for Wong's Kong King International (Holdings):

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

0.042 = HK$69m ÷ (HK$3.1b - HK$1.5b) (Based on the trailing twelve months to June 2020).

Thus, Wong's Kong King International (Holdings) has an ROCE of 4.2%. Ultimately, that's a low return and it under-performs the Electronic industry average of 7.7%.

See our latest analysis for Wong's Kong King International (Holdings)

Historical performance is a great place to start when researching a stock so above you can see the gauge for Wong's Kong King International (Holdings)'s ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Wong's Kong King International (Holdings), check out these free graphs here.

How Are Returns Trending?

We are a bit worried about the trend of returns on capital at Wong's Kong King International (Holdings). About five years ago, returns on capital were 5.8%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Wong's Kong King International (Holdings) becoming one if things continue as they have.

On a side note, Wong's Kong King International (Holdings)'s current liabilities are still rather high at 47% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Despite the concerning underlying trends, the stock has actually gained 35% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

One more thing, we've spotted 2 warning signs facing Wong's Kong King International (Holdings) that you might find interesting.

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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