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When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. 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. In light of that, from a first glance at Khong Guan (SGX:K03), we've spotted some signs that it could be struggling, so let's investigate.
What Is 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. The formula for this calculation on Khong Guan is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0067 = S$388k ÷ (S$67m - S$8.5m) (Based on the trailing twelve months to July 2023).
Thus, Khong Guan has an ROCE of 0.7%. In absolute terms, that's a low return and it also under-performs the Consumer Retailing industry average of 8.8%.
See our latest analysis for Khong Guan
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Khong Guan, check out these free graphs here.
How Are Returns Trending?
There is reason to be cautious about Khong Guan, given the returns are trending downwards. About five years ago, returns on capital were 3.6%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Khong Guan to turn into a multi-bagger.
Our Take On Khong Guan's ROCE
In summary, it's unfortunate that Khong Guan is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 44% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
Khong Guan does have some risks, we noticed 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.