KTK Group's (SHSE:603680) Returns On Capital Not Reflecting Well On The Business

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Although, when we looked at KTK Group (SHSE:603680), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for KTK Group:

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

0.034 = CN¥199m ÷ (CN¥9.1b - CN¥3.3b) (Based on the trailing twelve months to September 2023).

Thus, KTK Group has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the Machinery industry average of 6.0%.

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're interested in investigating KTK Group's past further, check out this free graph covering KTK Group's past earnings, revenue and cash flow.

What Does the ROCE Trend For KTK Group Tell Us?

On the surface, the trend of ROCE at KTK Group doesn't inspire confidence. To be more specific, ROCE has fallen from 12% over the last five years. 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. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

On a final note, we found 2 warning signs for KTK Group (1 is a bit unpleasant) you should be aware of.

While KTK Group 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.