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Improvement in profitability and outperformance against the industry can be important characteristics in a stock for some investors. Below, I will assess Kingsmen Creatives Ltd’s (SGX:5MZ) track record on a high level, to give you some insight into how the company has been performing against its historical trend and its industry peers.
Check out our latest analysis for Kingsmen Creatives
Was 5MZ’s weak performance lately a part of a long-term decline?
5MZ’s trailing twelve-month earnings (from 30 June 2018) of S$10m has declined by -19% compared to the previous year.
Furthermore, this one-year growth rate has been lower than its average earnings growth rate over the past 5 years of -9.7%, indicating the rate at which 5MZ is growing has slowed down. Why could this be happening? Well, let’s take a look at what’s occurring with margins and whether the entire industry is experiencing the hit as well.
Revenue growth over the last few years, has been positive, nevertheless earnings growth has been falling. This suggest that Kingsmen Creatives has been increasing expenses, which is harming margins and earnings, and is not a sustainable practice.
Eyeballing growth from a sector-level, the SG professional services industry has been growing its average earnings by double-digit 41% in the past year, and 16% over the past five years. Since the Professional Services sector in SG is relatively small, I’ve included similar companies in the wider region in order to get a better idea of the growth, which is a median of profitable companies of companies such as G. K. Goh Holdings, HRnetGroup and Boardroom. This suggests that whatever uplift the industry is deriving benefit from, Kingsmen Creatives has not been able to reap as much as its average peer.
In terms of returns from investment, Kingsmen Creatives has fallen short of achieving a 20% return on equity (ROE), recording 7.6% instead. Furthermore, its return on assets (ROA) of 3.9% is below the SG Professional Services industry of 8.0%, indicating Kingsmen Creatives’s are utilized less efficiently. And finally, its return on capital (ROC), which also accounts for Kingsmen Creatives’s debt level, has declined over the past 3 years from 17% to 7.6%. This correlates with an increase in debt holding, with debt-to-equity ratio rising from 4.9% to 21% over the past 5 years.
What does this mean?
Though Kingsmen Creatives’s past data is helpful, it is only one aspect of my investment thesis. Typically companies that experience a drawn out period of decline in earnings are undergoing some sort of reinvestment phase in order to keep up with the recent industry growth and disruption. I recommend you continue to research Kingsmen Creatives to get a more holistic view of the stock by looking at: