Returns On Capital Are Showing Encouraging Signs At Wong's Kong King International (Holdings) (HKG:532)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. With that in mind, we've noticed some promising trends at Wong's Kong King International (Holdings) (HKG:532) so let's look a bit deeper.

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 Wong's Kong King International (Holdings), this is the formula:

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

0.082 = HK$149m ÷ (HK$3.3b - HK$1.5b) (Based on the trailing twelve months to December 2020).

So, Wong's Kong King International (Holdings) has an ROCE of 8.2%. In absolute terms, that's a low return but it's around the Electronic industry average of 8.7%.

View 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'd like to look at how Wong's Kong King International (Holdings) has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Wong's Kong King International (Holdings)'s ROCE Trending?

Wong's Kong King International (Holdings)'s ROCE growth is quite impressive. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 41% in that same time. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

On a side note, Wong's Kong King International (Holdings)'s current liabilities are still rather high at 45% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Wong's Kong King International (Holdings)'s ROCE

As discussed above, Wong's Kong King International (Holdings) appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And with a respectable 63% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Wong's Kong King International (Holdings) can keep these trends up, it could have a bright future ahead.

If you want to continue researching Wong's Kong King International (Holdings), you might be interested to know about the 3 warning signs that our analysis has discovered.

While Wong's Kong King International (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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