KTK Group (SHSE:603680) Could Be Struggling To Allocate Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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 KTK Group (SHSE:603680), we don't think it's current trends fit the mold of a multi-bagger.

What Is 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 KTK Group is:

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

0.039 = CN¥233m ÷ (CN¥8.9b - CN¥3.0b) (Based on the trailing twelve months to March 2024).

Thus, KTK Group has an ROCE of 3.9%. Ultimately, that's a low return and it under-performs the Machinery industry average of 5.6%.

View our latest analysis for KTK Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for KTK Group's ROCE against it's prior returns. If you'd like to look at how KTK Group has performed in the past in other metrics, you can view this free graph of KTK Group's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of KTK Group's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 8.3%, but since then they've fallen to 3.9%. However it looks like KTK Group 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 may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From KTK Group's ROCE

To conclude, we've found that KTK Group is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 36% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

One more thing: We've identified 2 warning signs with KTK Group (at least 1 which is concerning) , and understanding them would certainly be useful.

While KTK Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com