Returns Are Gaining Momentum At KLN Logistics Group (HKG:636)

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at KLN Logistics Group (HKG:636) and its trend of ROCE, we really liked what we saw.

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Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on KLN Logistics Group is:

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

0.10 = HK$2.7b ÷ (HK$43b - HK$16b) (Based on the trailing twelve months to December 2024).

Therefore, KLN Logistics Group has an ROCE of 10.0%. On its own that's a low return, but compared to the average of 7.3% generated by the Logistics industry, it's much better.

See our latest analysis for KLN Logistics Group

In the above chart we have measured KLN Logistics Group's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for KLN Logistics Group .

What Does the ROCE Trend For KLN Logistics Group Tell Us?

We're pretty happy with how the ROCE has been trending at KLN Logistics Group. We found that the returns on capital employed over the last five years have risen by 49%. 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 29% less than it was five years ago, which can be indicative of a business that's improving its efficiency. KLN Logistics Group may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 36% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

In Conclusion...

In the end, KLN Logistics Group has proven it's capital allocation skills are good with those higher returns from less amount of capital. Considering the stock has delivered 28% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So with that in mind, we think the stock deserves further research.

One more thing: We've identified 3 warning signs with KLN Logistics Group (at least 1 which is significant) , and understanding them would certainly be useful.

While KLN Logistics Group 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.