Is Kein Hing International Berhad (KLSE:KEINHIN) Struggling?

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. On that note, looking into Kein Hing International Berhad (KLSE:KEINHIN), we weren't too upbeat about how things were going.

What is 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. The formula for this calculation on Kein Hing International Berhad is:

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

0.071 = RM11m ÷ (RM219m - RM65m) (Based on the trailing twelve months to October 2020).

Thus, Kein Hing International Berhad has an ROCE of 7.1%. Ultimately, that's a low return and it under-performs the Machinery industry average of 10%.

Check out our latest analysis for Kein Hing International Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Kein Hing International Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Kein Hing International Berhad, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

In terms of Kein Hing International Berhad's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 11%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Kein Hing International Berhad to turn into a multi-bagger.

In Conclusion...

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. It should come as no surprise then that the stock has fallen 14% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a final note, we found 3 warning signs for Kein Hing International Berhad (1 doesn't sit too well with us) you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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