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Why We’re Not Keen On Kingland Group Holdings Limited’s (HKG:1751) 7.4% Return On Capital

Simply Wall St

Today we'll evaluate Kingland Group Holdings Limited (HKG:1751) to determine whether it could have potential as an investment idea. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.

Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. In brief, it is a useful tool, but it is not without drawbacks. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.

How Do You Calculate Return On Capital Employed?

Analysts use this formula to calculate return on capital employed:

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

Or for Kingland Group Holdings:

0.074 = HK$9.7m ÷ (HK$151m - HK$18m) (Based on the trailing twelve months to June 2019.)

So, Kingland Group Holdings has an ROCE of 7.4%.

View our latest analysis for Kingland Group Holdings

Is Kingland Group Holdings's ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. We can see Kingland Group Holdings's ROCE is meaningfully below the Construction industry average of 12%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Setting aside the industry comparison for now, Kingland Group Holdings's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.

Kingland Group Holdings's current ROCE of 7.4% is lower than 3 years ago, when the company reported a 47% ROCE. This makes us wonder if the business is facing new challenges. The image below shows how Kingland Group Holdings's ROCE compares to its industry, and you can click it to see more detail on its past growth.

SEHK:1751 Past Revenue and Net Income, January 2nd 2020

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is only a point-in-time measure. How cyclical is Kingland Group Holdings? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.

Do Kingland Group Holdings's Current Liabilities Skew Its ROCE?

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counteract this, we check if a company has high current liabilities, relative to its total assets.

Kingland Group Holdings has total liabilities of HK$18m and total assets of HK$151m. As a result, its current liabilities are equal to approximately 12% of its total assets. This very reasonable level of current liabilities would not boost the ROCE by much.

The Bottom Line On Kingland Group Holdings's ROCE

If Kingland Group Holdings continues to earn an uninspiring ROCE, there may be better places to invest. Of course, you might also be able to find a better stock than Kingland Group Holdings. So you may wish to see this free collection of other companies that have grown earnings strongly.

I will like Kingland Group Holdings better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.