Is Karin Technology Holdings (SGX:K29) Struggling?

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. Having said that, after a brief look, Karin Technology Holdings (SGX:K29) we aren't filled with optimism, but let's investigate further.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Karin Technology Holdings:

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

0.01 = HK$4.7m ÷ (HK$986m - HK$538m) (Based on the trailing twelve months to December 2020).

So, Karin Technology Holdings has an ROCE of 1.0%. Ultimately, that's a low return and it under-performs the Electronic industry average of 12%.

Check out our latest analysis for Karin Technology Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Karin Technology Holdings' ROCE against it's prior returns. If you'd like to look at how Karin Technology Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

The trend of ROCE at Karin Technology Holdings is showing some signs of weakness. To be more specific, today's ROCE was 7.0% five years ago but has since fallen to 1.0%. In addition to that, Karin Technology Holdings is now employing 36% less capital than it was five years ago. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 55%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

Our Take On Karin Technology Holdings' ROCE

To see Karin Technology Holdings reducing the capital employed in the business in tandem with diminishing returns, is concerning. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 84% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Karin Technology Holdings does have some risks, we noticed 4 warning signs (and 1 which is a bit concerning) we think you should know about.

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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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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