Is This A Sign of Things To Come At Wong's Kong King International (Holdings) (HKG:532)?

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. So after we looked into Wong's Kong King International (Holdings) (HKG:532), the trends above didn't look too great.

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. To calculate this metric for Wong's Kong King International (Holdings), this is the formula:

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).

So, Wong's Kong King International (Holdings) has an ROCE of 4.2%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 8.1%.

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

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 Wong's Kong King International (Holdings), check out these free graphs here.

What Does the ROCE Trend For Wong's Kong King International (Holdings) Tell Us?

There is reason to be cautious about Wong's Kong King International (Holdings), given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 5.8% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. 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...

In summary, it's unfortunate that Wong's Kong King International (Holdings) is generating lower returns from the same amount of capital. Despite the concerning underlying trends, the stock has actually gained 2.2% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

If you'd like to know about the risks facing Wong's Kong King International (Holdings), we've discovered 2 warning signs that you should be aware of.

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. 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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