There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Kingfa Sci. & Tech (SHSE:600143) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Return On Capital Employed (ROCE): What Is It?
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 Kingfa Sci. & Tech, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.029 = CN¥1.2b ÷ (CN¥63b - CN¥22b) (Based on the trailing twelve months to March 2024).
Thus, Kingfa Sci. & Tech has an ROCE of 2.9%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 5.5%.
Above you can see how the current ROCE for Kingfa Sci. & Tech compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Kingfa Sci. & Tech for free.
The Trend Of ROCE
When we looked at the ROCE trend at Kingfa Sci. & Tech, we didn't gain much confidence. To be more specific, ROCE has fallen from 7.2% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
What We Can Learn From Kingfa Sci. & Tech's ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Kingfa Sci. & Tech. Furthermore the stock has climbed 70% over the last five years, it would appear that investors are upbeat about the future. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.
If you'd like to know more about Kingfa Sci. & Tech, we've spotted 4 warning signs, and 2 of them are a bit concerning.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.