If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Kai Yuan Holdings' (HKG:1215) returns on capital, so let's have a look.
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. To calculate this metric for Kai Yuan Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.016 = HK$32m ÷ (HK$3.6b - HK$1.6b) (Based on the trailing twelve months to June 2024).
Thus, Kai Yuan Holdings has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 6.9%.
Check out our latest analysis for Kai Yuan Holdings
Historical performance is a great place to start when researching a stock so above you can see the gauge for Kai Yuan Holdings' ROCE against it's prior returns. If you're interested in investigating Kai Yuan Holdings' past further, check out this free graph covering Kai Yuan Holdings' past earnings, revenue and cash flow.
So How Is Kai Yuan Holdings' ROCE Trending?
It's nice to see that ROCE is headed in the right direction, even if it is still relatively low. We found that the returns on capital employed over the last five years have risen by 72%. The company is now earning HK$0.02 per dollar of capital employed. Speaking of capital employed, the company is actually utilizing 26% less than it was five years ago, which can be indicative of a business that's improving its efficiency. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.
On a side note, Kai Yuan Holdings' current liabilities are still rather high at 44% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
In Conclusion...
In a nutshell, we're pleased to see that Kai Yuan Holdings has been able to generate higher returns from less capital. And since the stock has fallen 50% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
On a separate note, we've found 2 warning signs for Kai Yuan Holdings you'll probably want to 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. 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.