The Returns On Capital At Shijiazhuang Kelin Electric (SHSE:603050) Don't Inspire Confidence

To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Shijiazhuang Kelin Electric (SHSE:603050), we don't think it's current trends fit the mold of a multi-bagger.

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. To calculate this metric for Shijiazhuang Kelin Electric, this is the formula:

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

0.062 = CN¥189m ÷ (CN¥5.0b - CN¥2.0b) (Based on the trailing twelve months to September 2023).

Therefore, Shijiazhuang Kelin Electric has an ROCE of 6.2%. Even though it's in line with the industry average of 6.5%, it's still a low return by itself.

View our latest analysis for Shijiazhuang Kelin Electric

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Shijiazhuang Kelin Electric's past further, check out this free graph covering Shijiazhuang Kelin Electric's past earnings, revenue and cash flow.

What Does the ROCE Trend For Shijiazhuang Kelin Electric Tell Us?

When we looked at the ROCE trend at Shijiazhuang Kelin Electric, we didn't gain much confidence. To be more specific, ROCE has fallen from 8.6% over the last five years. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From Shijiazhuang Kelin Electric's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Shijiazhuang Kelin Electric is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 166% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Shijiazhuang Kelin Electric does have some risks, we noticed 4 warning signs (and 1 which is a bit unpleasant) we think you should know about.

While Shijiazhuang Kelin Electric 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.