K & P International Holdings' (HKG:675) Returns On Capital Are Heading Higher

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. So on that note, K & P International Holdings (HKG:675) looks quite promising in regards to its trends of return on capital.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed 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)

0.15 = HK$56m ÷ (HK$518m - HK$134m) (Based on the trailing twelve months to June 2021).

So, K & P International Holdings has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Electronic industry average of 7.9% 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 want to delve into the historical earnings, revenue and cash flow of K & P International Holdings, check out these free graphs here.

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

K & P International Holdings has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 15% which is a sight for sore eyes. In addition to that, K & P International Holdings is employing 46% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

Our Take On K & P International Holdings' ROCE

Overall, K & P International Holdings gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. So researching this company further and determining whether or not these trends will continue seems justified.

On a final note, we've found 3 warning signs for K & P International Holdings that we think 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. 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.