Can K & P International Holdings (HKG:675) Continue To Grow Its Returns On Capital?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at K & P International Holdings (HKG:675) so let's look a bit deeper.

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

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 K & P International Holdings is:

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

0.098 = HK$31m ÷ (HK$395m - HK$77m) (Based on the trailing twelve months to June 2020).

Therefore, K & P International Holdings has an ROCE of 9.8%. On its own that's a low return, but compared to the average of 8.1% generated by the Electronic industry, it's much better.

Check out our latest analysis for K & P International Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for K & P International Holdings' ROCE against it's prior returns. If you're interested in investigating K & P International Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For K & P International Holdings Tell Us?

K & P International Holdings has not disappointed with their ROCE growth. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 13,325% 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. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

One more thing to note, K & P International Holdings has decreased current liabilities to 20% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

What We Can Learn From K & P International Holdings' ROCE

In summary, we're delighted to see that K & P International Holdings has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Given the stock has declined 25% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

On a separate note, we've found 2 warning signs for K & P International Holdings you'll probably want to know about.

While K & P 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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