If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Keli Sensing Technology (Ningbo)Ltd (SHSE:603662) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Keli Sensing Technology (Ningbo)Ltd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.083 = CN¥219m ÷ (CN¥3.8b - CN¥1.2b) (Based on the trailing twelve months to September 2023).
Therefore, Keli Sensing Technology (Ningbo)Ltd has an ROCE of 8.3%. On its own that's a low return, but compared to the average of 6.4% generated by the Electrical industry, it's much better.
Above you can see how the current ROCE for Keli Sensing Technology (Ningbo)Ltd 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 Keli Sensing Technology (Ningbo)Ltd here for free.
What Can We Tell From Keli Sensing Technology (Ningbo)Ltd's ROCE Trend?
On the surface, the trend of ROCE at Keli Sensing Technology (Ningbo)Ltd doesn't inspire confidence. To be more specific, ROCE has fallen from 11% over the last five years. However it looks like Keli Sensing Technology (Ningbo)Ltd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
The Key Takeaway
To conclude, we've found that Keli Sensing Technology (Ningbo)Ltd is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 59% over the last three years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
One more thing, we've spotted 3 warning signs facing Keli Sensing Technology (Ningbo)Ltd that you might find interesting.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
