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. However, after briefly looking over the numbers, we don't think TKD Science and TechnologyLtd (SHSE:603738) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on TKD Science and TechnologyLtd is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.049 = CN¥91m ÷ (CN¥2.0b - CN¥162m) (Based on the trailing twelve months to September 2023).

Thus, TKD Science and TechnologyLtd has an ROCE of 4.9%. Ultimately, that's a low return and it under-performs the Electrical industry average of 6.3%.

View our latest analysis for TKD Science and TechnologyLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for TKD Science and TechnologyLtd's ROCE against it's prior returns. If you're interested in investigating TKD Science and TechnologyLtd's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is TKD Science and TechnologyLtd's ROCE Trending?

When we looked at the ROCE trend at TKD Science and TechnologyLtd, we didn't gain much confidence. To be more specific, ROCE has fallen from 9.4% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, TKD Science and TechnologyLtd has done well to pay down its current liabilities to 8.1% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On TKD Science and TechnologyLtd's ROCE

We're a bit apprehensive about TKD Science and TechnologyLtd because despite more capital being deployed in the business, returns on that capital and sales have both fallen. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 192%. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Like most companies, TKD Science and TechnologyLtd does come with some risks, and we've found 3 warning signs that you should be aware of.

While TKD Science and TechnologyLtd 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.