Keli Sensing Technology (Ningbo)Ltd's (SHSE:603662) Returns On Capital Not Reflecting Well On The Business

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Keli Sensing Technology (Ningbo)Ltd (SHSE:603662), we don't think it's current trends fit the mold of a multi-bagger.

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. To calculate this metric for Keli Sensing Technology (Ningbo)Ltd, this is the formula:

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

0.08 = CN¥232m ÷ (CN¥4.1b - CN¥1.2b) (Based on the trailing twelve months to March 2024).

Thus, Keli Sensing Technology (Ningbo)Ltd has an ROCE of 8.0%. On its own that's a low return, but compared to the average of 6.0% generated by the Electrical industry, it's much better.

View our latest analysis for Keli Sensing Technology (Ningbo)Ltd

In the above chart we have measured Keli Sensing Technology (Ningbo)Ltd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Keli Sensing Technology (Ningbo)Ltd for free.

How Are Returns Trending?

When we looked at the ROCE trend at Keli Sensing Technology (Ningbo)Ltd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 8.0% from 12% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 29%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

What We Can Learn From Keli Sensing Technology (Ningbo)Ltd's ROCE

In summary, Keli Sensing Technology (Ningbo)Ltd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Although the market must be expecting these trends to improve because the stock has gained 45% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One more thing, we've spotted 2 warning signs facing Keli Sensing Technology (Ningbo)Ltd that you might find interesting.

While Keli Sensing Technology (Ningbo)Ltd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.