We're Watching These Trends At Kingfa Science & Technology (India) (NSE:KINGFA)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Kingfa Science & Technology (India) (NSE:KINGFA), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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. Analysts use this formula to calculate it for Kingfa Science & Technology (India):

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

0.083 = ₹305m ÷ (₹6.0b - ₹2.3b) (Based on the trailing twelve months to June 2020).

So, Kingfa Science & Technology (India) has an ROCE of 8.3%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 13%.

View our latest analysis for Kingfa Science & Technology (India)

Historical performance is a great place to start when researching a stock so above you can see the gauge for Kingfa Science & Technology (India)'s ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Kingfa Science & Technology (India), check out these free graphs here.

What Does the ROCE Trend For Kingfa Science & Technology (India) Tell Us?

In terms of Kingfa Science & Technology (India)'s historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 27%, but since then they've fallen to 8.3%. 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, Kingfa Science & Technology (India) has done well to pay down its current liabilities to 38% of total assets. That could partly explain why the ROCE has dropped. 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Kingfa Science & Technology (India)'s ROCE

We're a bit apprehensive about Kingfa Science & Technology (India) because despite more capital being deployed in the business, returns on that capital and sales have both fallen. It should come as no surprise then that the stock has fallen 33% over the last three years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One more thing to note, we've identified 3 warning signs with Kingfa Science & Technology (India) and understanding these should be part of your investment process.

While Kingfa Science & Technology (India) isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. 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.
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