Returns On Capital Are Showing Encouraging Signs At Shenzhen Kedali Industry (SZSE:002850)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Shenzhen Kedali Industry (SZSE:002850) and its trend of ROCE, we really liked what we saw.

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. To calculate this metric for Shenzhen Kedali Industry, this is the formula:

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

0.12 = CN¥1.5b ÷ (CN¥17b - CN¥4.4b) (Based on the trailing twelve months to March 2024).

Thus, Shenzhen Kedali Industry has an ROCE of 12%. 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 Shenzhen Kedali Industry

In the above chart we have measured Shenzhen Kedali Industry's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Shenzhen Kedali Industry .

What Does the ROCE Trend For Shenzhen Kedali Industry Tell Us?

We like the trends that we're seeing from Shenzhen Kedali Industry. The data shows that returns on capital have increased substantially over the last five years to 12%. The amount of capital employed has increased too, by 423%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

The Bottom Line On Shenzhen Kedali Industry's ROCE

To sum it up, Shenzhen Kedali Industry has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 382% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Shenzhen Kedali Industry can keep these trends up, it could have a bright future ahead.

Shenzhen Kedali Industry does have some risks, we noticed 3 warning signs (and 1 which is a bit concerning) we think you should know about.

While Shenzhen Kedali Industry 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.

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.

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