Are Investors Concerned With What's Going On At Khong Guan (SGX:K03)?

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. In light of that, from a first glance at Khong Guan (SGX:K03), we've spotted some signs that it could be struggling, so let's investigate.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Khong Guan, this is the formula:

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

0.01 = S$652k ÷ (S$72m - S$8.1m) (Based on the trailing twelve months to July 2020).

Thus, Khong Guan has an ROCE of 1.0%. Ultimately, that's a low return and it under-performs the Consumer Retailing industry average of 9.3%.

Check out our latest analysis for Khong Guan

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 Khong Guan, check out these free graphs here.

How Are Returns Trending?

There is reason to be cautious about Khong Guan, given the returns are trending downwards. About five years ago, returns on capital were 8.5%, 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. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Khong Guan becoming one if things continue as they have.

Our Take On Khong Guan's ROCE

In summary, it's unfortunate that Khong Guan is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last five years have experienced a 17% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Khong Guan does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is potentially serious...

While Khong Guan 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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