When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that’s often how a mature business shows signs of aging. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. Having said that, after a brief look, Karin Technology Holdings (SGX:K29) we aren’t filled with optimism, but let’s investigate further.
What is Return On Capital Employed (ROCE)?
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. Analysts use this formula to calculate it for Karin Technology Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.055 = HK$24m ÷ (HK$915m – HK$471m) (Based on the trailing twelve months to December 2019).
So, Karin Technology Holdings has an ROCE of 5.5%. In absolute terms, that’s a low return and it also under-performs the Electronic industry average of 8.9%.
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, revenue and cash flow of Karin Technology Holdings, check out these free graphs here.
What Can We Tell From Karin Technology Holdings’ ROCE Trend?
In terms of Karin Technology Holdings’ historical ROCE trend, it isn’t fantastic. The company used to generate 11% on its capital five years ago but it has since fallen noticeably. What’s equally concerning is that the amount of capital deployed in the business has shrunk by 34% over that same period. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. If these underlying trends continue, we wouldn’t be too optimistic 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 51%, which we’d consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we’d like to see this reduce as that would mean fewer obligations bearing risks.
The Bottom Line On Karin Technology Holdings’ ROCE
In summary, it’s unfortunate that Karin Technology Holdings is shrinking its capital base and also generating lower returns. However the stock has delivered a 45% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don’t bode well for long term performance so unless they reverse, we’d start looking elsewhere.
Karin Technology Holdings does have some risks, we noticed 3 warning signs (and 1 which is a bit concerning) we think you should know about.
While Karin Technology Holdings isn’t earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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This article by Simply Wall St is general in nature. 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.
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