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

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. With that in mind, we've noticed some promising trends at Shenzhen Kedali Industry (SZSE:002850) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Shenzhen Kedali Industry:

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

0.12 = CN¥1.6b ÷ (CN¥17b - CN¥4.7b) (Based on the trailing twelve months to June 2024).

Therefore, Shenzhen Kedali Industry has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Auto Components industry average of 7.3% it's much better.

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're interested, you can view the analysts predictions in our free analyst report for Shenzhen Kedali Industry .

What Can We Tell From Shenzhen Kedali Industry's ROCE Trend?

We like the trends that we're seeing from Shenzhen Kedali Industry. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 12%. The amount of capital employed has increased too, by 415%. 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

In summary, it's great to see that Shenzhen Kedali Industry can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you want to continue researching Shenzhen Kedali Industry, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Shenzhen Kedali Industry 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.