When researching a stock for investment, what can tell us that the company is in decline? 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. Basically the company is earning less on its investments and it is also reducing its total assets. So after glancing at the trends within Kingboard Laminates Holdings (HKG:1888), we weren't too hopeful.
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 Kingboard Laminates Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.059 = HK$1.1b ÷ (HK$24b - HK$6.2b) (Based on the trailing twelve months to June 2023).
Therefore, Kingboard Laminates Holdings has an ROCE of 5.9%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 8.4%.
Above you can see how the current ROCE for Kingboard Laminates Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Kingboard Laminates Holdings here for free.
So How Is Kingboard Laminates Holdings' ROCE Trending?
In terms of Kingboard Laminates Holdings' historical ROCE trend, it isn't fantastic. To be more specific, today's ROCE was 19% five years ago but has since fallen to 5.9%. What's equally concerning is that the amount of capital deployed in the business has shrunk by 22% over that same period. 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. If these underlying trends continue, we wouldn't be too optimistic going forward.
What We Can Learn From Kingboard Laminates Holdings' ROCE
In summary, it's unfortunate that Kingboard Laminates Holdings is shrinking its capital base and also generating lower returns. Investors haven't taken kindly to these developments, since the stock has declined 14% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
One more thing to note, we've identified 2 warning signs with Kingboard Laminates Holdings and understanding them should be part of your investment process.
While Kingboard Laminates Holdings 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. 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.