If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? 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 we looked into Kingboard Laminates Holdings (HKG:1888), the trends above didn't look too great.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Kingboard Laminates Holdings is:

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

0.11 = HK$1.9b ÷ (HK$25b - HK$6.9b) (Based on the trailing twelve months to June 2024).

Thus, Kingboard Laminates Holdings has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Electronic industry average of 7.2% it's much better.

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 to see what analysts are forecasting going forward, you should check out our free analyst report for Kingboard Laminates Holdings .

The Trend Of ROCE

The trend of returns that Kingboard Laminates Holdings is generating are raising some concerns. The company used to generate 16% on its capital five years ago but it has since fallen noticeably. In addition to that, Kingboard Laminates Holdings is now employing 20% less capital than it was five years ago. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. If these underlying trends continue, we wouldn't be too optimistic going forward.

What We Can Learn From Kingboard Laminates Holdings' ROCE

To see Kingboard Laminates Holdings reducing the capital employed in the business in tandem with diminishing returns, is concerning. Investors must expect better things on the horizon though because the stock has risen 26% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

If you're still interested in Kingboard Laminates Holdings it's worth checking out our FREE intrinsic value approximation for 1888 to see if it's trading at an attractive price in other respects.

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.