Luxking Group Holdings' (SGX:BKK) Returns On Capital Are Heading Higher

There are a few key trends to look for if we want to identify the next multi-bagger. 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 on that note, Luxking Group Holdings (SGX:BKK) looks quite promising in regards to its trends of return on capital.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Luxking Group Holdings, this is the formula:

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

0.13 = CN¥18m ÷ (CN¥287m - CN¥150m) (Based on the trailing twelve months to June 2021).

So, Luxking Group Holdings has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Commercial Services industry average of 5.4% it's much better.

Check out our latest analysis for Luxking Group Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Luxking Group Holdings' ROCE against it's prior returns. If you're interested in investigating Luxking Group Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Luxking Group Holdings' ROCE Trend?

We're pretty happy with how the ROCE has been trending at Luxking Group Holdings. The figures show that over the last five years, returns on capital have grown by 84%. The company is now earning CN¥0.1 per dollar of capital employed. In regards to capital employed, Luxking Group Holdings appears to been achieving more with less, since the business is using 40% less capital to run its operation. Luxking Group Holdings 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 52% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.

The Key Takeaway

From what we've seen above, Luxking Group Holdings has managed to increase it's returns on capital all the while reducing it's capital base. Astute investors may have an opportunity here because the stock has declined 14% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Luxking Group Holdings (of which 1 is significant!) that you should know about.

While Luxking Group Holdings 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.

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.

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