We Like These Underlying Trends At K & P International Holdings (HKG:675)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. Speaking of which, we noticed some great changes in K & P International Holdings' (HKG:675) returns on capital, so let's have a look.

Understanding 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. To calculate this metric for K & P International Holdings, this is the formula:

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%. In absolute terms, that's a low return, but it's much better than the Electronic industry average of 7.7%.

See 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 Can We Tell From K & P International Holdings' ROCE Trend?

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 it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. 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.

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. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Key Takeaway

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. And since the stock has fallen 16% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

K & P International Holdings does have some risks though, and we've spotted 3 warning signs for K & P International Holdings that you might be interested in.

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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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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