Returns Are Gaining Momentum At Kong Sun Holdings (HKG:295)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Kong Sun Holdings (HKG:295) so let's look a bit deeper.

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. Analysts use this formula to calculate it for Kong Sun Holdings:

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

0.036 = CN¥181m ÷ (CN¥6.6b - CN¥1.6b) (Based on the trailing twelve months to June 2022).

Therefore, Kong Sun Holdings has an ROCE of 3.6%. In absolute terms, that's a low return and it also under-performs the Renewable Energy industry average of 6.5%.

See our latest analysis for Kong Sun Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Kong Sun Holdings' ROCE against it's prior returns. If you'd like to look at how Kong Sun Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

While the ROCE is still rather low for Kong Sun Holdings, we're glad to see it heading in the right direction. The data shows that returns on capital have increased by 84% over the trailing five years. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Interestingly, the business may be becoming more efficient because it's applying 63% less capital than it was five years ago. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

Our Take On Kong Sun Holdings' ROCE

In a nutshell, we're pleased to see that Kong Sun Holdings has been able to generate higher returns from less capital. However the stock is down a substantial 89% in the last five years so there could be other areas of the business hurting its prospects. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

One more thing: We've identified 2 warning signs with Kong Sun Holdings (at least 1 which is a bit concerning) , and understanding them would certainly be useful.

While Kong Sun 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.