If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should 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. So on that note, King Wan (SGX:554) looks quite promising in regards to its trends of return on capital.
Return On Capital Employed (ROCE): What is it?
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 King Wan:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.039 = S$2.2m ÷ (S$113m - S$54m) (Based on the trailing twelve months to March 2020).
So, King Wan has an ROCE of 3.9%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.2%.
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'd like to look at how King Wan has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
We're delighted to see that King Wan is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but now it's turned around, earning 3.9% which is no doubt a relief for some early shareholders. Additionally, the business is utilizing 41% 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. King Wan could be selling under-performing assets since the ROCE is improving.Another thing to note, King Wan has a high ratio of current liabilities to total assets of 48%. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
Our Take 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. Although the company may be facing some issues elsewhere since the stock has plunged 73% in the last five years. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.
King Wan does have some risks, we noticed 4 warning signs (and 1 which is concerning) we think you should know about.
While King Wan 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. 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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