When researching a stock for investment, what can tell us that the company is in decline? Typically, we’ll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. So after glancing at the trends within Kori Holdings (Catalist:5VC), we weren’t too hopeful.
If you haven’t worked with ROCE before, it measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Kori Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.014 = S$844k ÷ (S$77m – S$16m) (Based on the trailing twelve months to June 2024).
Therefore, Kori Holdings has an ROCE of 1.4%. Ultimately, that’s a low return and it under-performs the Construction industry average of 12%.
View our latest analysis for Kori Holdings
Historical performance is a great place to start when researching a stock so above you can see the gauge for Kori 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 Kori Holdings.
We are a bit worried about the trend of returns on capital at Kori Holdings. To be more specific, the ROCE was 5.4% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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 Kori Holdings to turn into a multi-bagger.
In the end, the trend of lower returns on the same amount of capital isn’t typically an indication that we’re looking at a growth stock. Investors haven’t taken kindly to these developments, since the stock has declined 45% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we’d consider looking elsewhere.
Kori Holdings does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is significant…
While Kori Holdings may not currently earn the highest returns, we’ve compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.