Will the Promising Trends At King Wan (SGX:554) Continue?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Speaking of which, we noticed some great changes in King Wan's (SGX:554) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What is it?

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. To calculate this metric for King Wan, this is the formula:

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

0.043 = S$2.5m ÷ (S$103m - S$46m) (Based on the trailing twelve months to September 2020).

So, King Wan has an ROCE of 4.3%. In absolute terms, that's a low return, but it's much better than the Construction industry average of 1.9%.

View our latest analysis for King Wan

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of King Wan, check out these free graphs here.

How Are Returns Trending?

Like most people, we're pleased that King Wan is now generating some pretax earnings. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 4.3% on their capital employed. Additionally, the business is utilizing 42% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

Another thing to note, King Wan has a high ratio of current liabilities to total assets of 44%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On King Wan's ROCE

In summary, it's great to see that King Wan has been able to turn things around and earn higher returns on lower amounts of capital. However the stock is down a substantial 80% 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 final note, you should learn about the 3 warning signs we've spotted with King Wan (including 2 which is can't be ignored) .

While King Wan 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. 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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