TKD Science and TechnologyLtd (SHSE:603738) Might Be Having Difficulty Using Its Capital Effectively

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at TKD Science and TechnologyLtd (SHSE:603738) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for TKD Science and TechnologyLtd, this is the formula:

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

0.039 = CN¥71m ÷ (CN¥2.0b - CN¥162m) (Based on the trailing twelve months to September 2023).

Therefore, TKD Science and TechnologyLtd has an ROCE of 3.9%. Ultimately, that's a low return and it under-performs the Electrical industry average of 6.3%.

View our latest analysis for TKD Science and TechnologyLtd

Above you can see how the current ROCE for TKD Science and TechnologyLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for TKD Science and TechnologyLtd .

What Can We Tell From TKD Science and TechnologyLtd's ROCE Trend?

When we looked at the ROCE trend at TKD Science and TechnologyLtd, we didn't gain much confidence. To be more specific, ROCE has fallen from 9.4% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, TKD Science and TechnologyLtd has done well to pay down its current liabilities to 8.1% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On TKD Science and TechnologyLtd's ROCE

In summary, we're somewhat concerned by TKD Science and TechnologyLtd's diminishing returns on increasing amounts of capital. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 66% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Like most companies, TKD Science and TechnologyLtd does come with some risks, and we've found 3 warning signs that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.