Returns to King Wan (SGX: 554) are on the rise
If we want to find a potential multi-bagger, there are often underlying trends that can provide clues. First, we would like to identify a growth come back on capital employed (ROCE) and at the same time, a base capital employed. Basically, this means that a business has profitable initiatives that it can continue to reinvest in, which is a hallmark of a blending machine. So when we looked King Wan (SGX:554) and its ROCE trend, we really liked what we saw.
What is return on capital employed (ROCE)?
Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. Analysts use this formula to calculate it for King Wan:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.014 = 1.0 million Singapore dollars ÷ (125 million Singapore dollars – 52 million Singapore dollars) (Based on the last twelve months to March 2022).
So, King Wan has a ROCE of 1.4%. In absolute terms, this is a weak return and it is also below the construction industry average of 2.0%.
See our latest analysis for King Wan
Although the past is not indicative of the future, it can be useful to know the historical performance of a company, which is why we have this graph above. If you want to dive deep into King Wan’s earnings, revenue, and cash flow history, check out these free graphics here.
What the ROCE trend can tell us
Although the ROCE is not as high as some other companies, it is good to see that it is on the rise. Looking at the data, we can see that even though the capital employed in the business has remained relatively stable, the ROCE generated has increased by 33% over the last five years. So our view is that the company has increased its efficiency to generate these higher returns, while not needing to make additional investments. On that front, things are looking good, so it’s worth exploring what management has been saying about upcoming growth plans.
Another thing to note, King Wan has a high current liabilities to total assets ratio of 42%. This may entail certain risks, since the company is essentially dependent on its suppliers or other types of short-term creditors. Although this is not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Key Takeaway
As noted above, King Wan appears to be becoming more efficient at generating returns as capital employed has remained stable but earnings (before interest and taxes) are on the rise. And since the stock has plunged 71% in the past five years, other factors may affect the company’s outlook. Either way, we believe the underlying fundamentals warrant this stock being investigated further.
If you want to know the risks that King Wan faces, we found out 3 warning signs of which you should be aware.
Although King Wan does not currently generate the highest returns, we have compiled a list of companies that currently generate more than 25% return on equity. look at this free list here.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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