In This Article:
Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Karin Technology Holdings (SGX:K29), we don't think it's current trends fit the mold of a multi-bagger.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Karin Technology Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.067 = HK$30m ÷ (HK$1.2b - HK$722m) (Based on the trailing twelve months to June 2024).
Therefore, Karin Technology Holdings has an ROCE of 6.7%. Ultimately, that's a low return and it under-performs the Electronic industry average of 8.6%.
Check out our latest analysis for Karin Technology Holdings
Historical performance is a great place to start when researching a stock so above you can see the gauge for Karin Technology Holdings' 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 Karin Technology Holdings.
What The Trend Of ROCE Can Tell Us
Over the past five years, Karin Technology Holdings' ROCE and capital employed have both remained mostly flat. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Karin Technology Holdings to be a multi-bagger going forward.
On a separate but related note, it's important to know that Karin Technology Holdings has a current liabilities to total assets ratio of 62%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
In Conclusion...
In summary, Karin Technology Holdings isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Since the stock has gained an impressive 45% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.