Returns Are Gaining Momentum At Shijiazhuang Kelin Electric (SHSE:603050)

What are the early trends we should look for to identify a stock that could 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. 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 Shijiazhuang Kelin Electric (SHSE:603050) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Shijiazhuang Kelin Electric is:

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

0.11 = CN¥330m ÷ (CN¥5.4b - CN¥2.4b) (Based on the trailing twelve months to March 2024).

Thus, Shijiazhuang Kelin Electric has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Electrical industry average of 6.0% it's much better.

See our latest analysis for Shijiazhuang Kelin Electric

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shijiazhuang Kelin Electric's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Shijiazhuang Kelin Electric.

How Are Returns Trending?

We like the trends that we're seeing from Shijiazhuang Kelin Electric. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 11%. The amount of capital employed has increased too, by 177%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a side note, Shijiazhuang Kelin Electric's current liabilities are still rather high at 44% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Shijiazhuang Kelin Electric's ROCE

All in all, it's terrific to see that Shijiazhuang Kelin Electric is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 335% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Shijiazhuang Kelin Electric does have some risks though, and we've spotted 2 warning signs for Shijiazhuang Kelin Electric that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.