If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Suzhou Kingswood Education Technology (SZSE:300192) looks quite promising in regards to its trends of return on capital.
Understanding 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. Analysts use this formula to calculate it for Suzhou Kingswood Education Technology:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = CN¥165m ÷ (CN¥1.1b - CN¥226m) (Based on the trailing twelve months to June 2024).
So, Suzhou Kingswood Education Technology has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 5.6% it's much better.
In the above chart we have measured Suzhou Kingswood Education Technology's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Suzhou Kingswood Education Technology .
So How Is Suzhou Kingswood Education Technology's ROCE Trending?
We're pretty happy with how the ROCE has been trending at Suzhou Kingswood Education Technology. The data shows that returns on capital have increased by 43% over the trailing five years. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Interestingly, the business may be becoming more efficient because it's applying 26% less capital than it was five years ago. Suzhou Kingswood Education Technology may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
What We Can Learn From Suzhou Kingswood Education Technology's ROCE
In the end, Suzhou Kingswood Education Technology has proven it's capital allocation skills are good with those higher returns from less amount of capital. Considering the stock has delivered 13% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So with that in mind, we think the stock deserves further research.
One final note, you should learn about the 2 warning signs we've spotted with Suzhou Kingswood Education Technology (including 1 which can't be ignored) .
While Suzhou Kingswood Education Technology 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.
