Returns At Nanjing Kangni Mechanical & ElectricalLtd (SHSE:603111) Are On The Way Up

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. So on that note, Nanjing Kangni Mechanical & ElectricalLtd (SHSE:603111) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Nanjing Kangni Mechanical & ElectricalLtd:

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

0.093 = CN¥386m ÷ (CN¥6.1b - CN¥1.9b) (Based on the trailing twelve months to March 2024).

So, Nanjing Kangni Mechanical & ElectricalLtd has an ROCE of 9.3%. On its own that's a low return, but compared to the average of 5.6% generated by the Machinery industry, it's much better.

View our latest analysis for Nanjing Kangni Mechanical & ElectricalLtd

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'd like to look at how Nanjing Kangni Mechanical & ElectricalLtd has performed in the past in other metrics, you can view this free graph of Nanjing Kangni Mechanical & ElectricalLtd's past earnings, revenue and cash flow.

What Does the ROCE Trend For Nanjing Kangni Mechanical & ElectricalLtd Tell Us?

The fact that Nanjing Kangni Mechanical & ElectricalLtd is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 9.3% on its capital. Not only that, but the company is utilizing 80% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a related note, the company's ratio of current liabilities to total assets has decreased to 32%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

What We Can Learn From Nanjing Kangni Mechanical & ElectricalLtd's ROCE

To the delight of most shareholders, Nanjing Kangni Mechanical & ElectricalLtd has now broken into profitability. Since the stock has only returned 23% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

If you want to continue researching Nanjing Kangni Mechanical & ElectricalLtd, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Nanjing Kangni Mechanical & ElectricalLtd 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.

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