Returns On Capital Are Showing Encouraging Signs At Kerry Logistics Network (HKG:636)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Kerry Logistics Network's (HKG:636) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Kerry Logistics Network is:

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

0.087 = HK$2.3b ÷ (HK$41b - HK$14b) (Based on the trailing twelve months to June 2024).

Thus, Kerry Logistics Network has an ROCE of 8.7%. In absolute terms, that's a low return, but it's much better than the Logistics industry average of 7.2%.

View our latest analysis for Kerry Logistics Network

Above you can see how the current ROCE for Kerry Logistics Network compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Kerry Logistics Network for free.

What Can We Tell From Kerry Logistics Network's ROCE Trend?

You'd find it hard not to be impressed with the ROCE trend at Kerry Logistics Network. We found that the returns on capital employed over the last five years have risen by 36%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Speaking of capital employed, the company is actually utilizing 27% less than it was five years ago, which can be indicative of a business that's improving its efficiency. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 34% of the business, which is more than it was five years ago. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

What We Can Learn From Kerry Logistics Network's ROCE

In summary, it's great to see that Kerry Logistics Network has been able to turn things around and earn higher returns on lower amounts of capital. Given the stock has declined 12% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you want to know some of the risks facing Kerry Logistics Network we've found 2 warning signs (1 is potentially serious!) that you should be aware of before investing here.

While Kerry Logistics Network 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. 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.