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When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. 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. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. And from a first read, things don't look too good at King Wan (SGX:554), so let's see why.
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 King Wan, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.003 = S$216k ÷ (S$119m - S$47m) (Based on the trailing twelve months to September 2024).
Therefore, King Wan has an ROCE of 0.3%. Ultimately, that's a low return and it under-performs the Construction industry average of 12%.
Check out our latest analysis for King Wan
Historical performance is a great place to start when researching a stock so above you can see the gauge for King Wan's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of King Wan.
What The Trend Of ROCE Can Tell Us
There is reason to be cautious about King Wan, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 1.8% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on King Wan becoming one if things continue as they have.
In Conclusion...
In summary, it's unfortunate that King Wan is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 53% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
On a separate note, we've found 2 warning signs for King Wan you'll probably want to know about.