There Are Reasons To Feel Uneasy About KEBODA TECHNOLOGY's (SHSE:603786) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at KEBODA TECHNOLOGY (SHSE:603786) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

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 KEBODA TECHNOLOGY is:

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

0.13 = CN¥671m ÷ (CN¥6.8b - CN¥1.6b) (Based on the trailing twelve months to March 2024).

So, KEBODA TECHNOLOGY has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 6.9% generated by the Auto Components industry.

View our latest analysis for KEBODA TECHNOLOGY

Above you can see how the current ROCE for KEBODA TECHNOLOGY 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 KEBODA TECHNOLOGY for free.

How Are Returns Trending?

On the surface, the trend of ROCE at KEBODA TECHNOLOGY doesn't inspire confidence. Around five years ago the returns on capital were 26%, but since then they've fallen to 13%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for KEBODA TECHNOLOGY. However, despite the promising trends, the stock has fallen 11% over the last three years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Like most companies, KEBODA TECHNOLOGY does come with some risks, and we've found 1 warning sign that you should be aware of.

While KEBODA TECHNOLOGY 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. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com