Returns At K & P International Holdings (HKG:675) Are On The Way Up

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at K & P International Holdings (HKG:675) so let's look a bit deeper.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for K & P International Holdings:

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

0.082 = HK$33m ÷ (HK$497m - HK$99m) (Based on the trailing twelve months to June 2022).

Thus, K & P International Holdings has an ROCE of 8.2%. In absolute terms, that's a low return, but it's much better than the Electronic industry average of 6.7%.

View 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?

We're delighted to see that K & P International Holdings is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 8.2% which is a sight for sore eyes. In addition to that, K & P International Holdings is employing 55% 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.

On a related note, the company's ratio of current liabilities to total assets has decreased to 20%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Bottom Line On K & P International Holdings' ROCE

To the delight of most shareholders, K & P International Holdings has now broken into profitability. Given the stock has declined 10% 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.

Like most companies, K & P International Holdings does come with some risks, and we've found 3 warning signs that you should be aware of.

While K & P International Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.