Ningbo KBE Electrical TechnologyLtd (SZSE:300863) Is Reinvesting At Lower Rates Of Return

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Ningbo KBE Electrical TechnologyLtd (SZSE:300863) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 Ningbo KBE Electrical TechnologyLtd:

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

0.15 = CN¥251m ÷ (CN¥3.3b - CN¥1.6b) (Based on the trailing twelve months to September 2024).

Therefore, Ningbo KBE Electrical TechnologyLtd has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 7.0% generated by the Auto Components industry.

Check out our latest analysis for Ningbo KBE Electrical TechnologyLtd

Above you can see how the current ROCE for Ningbo KBE Electrical TechnologyLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Ningbo KBE Electrical TechnologyLtd .

The Trend Of ROCE

On the surface, the trend of ROCE at Ningbo KBE Electrical TechnologyLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 15% from 26% five years ago. However it looks like Ningbo KBE Electrical TechnologyLtd 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a separate but related note, it's important to know that Ningbo KBE Electrical TechnologyLtd has a current liabilities to total assets ratio of 48%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Ningbo KBE Electrical TechnologyLtd's ROCE

Bringing it all together, while we're somewhat encouraged by Ningbo KBE Electrical TechnologyLtd's reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 30% over the last three years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Ningbo KBE Electrical TechnologyLtd does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

While Ningbo KBE Electrical TechnologyLtd 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.