L&K Engineering (Suzhou)Ltd (SHSE:603929) Is Very Good At Capital Allocation

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Speaking of which, we noticed some great changes in L&K Engineering (Suzhou)Ltd's (SHSE:603929) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for L&K Engineering (Suzhou)Ltd:

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

0.33 = CN¥492m ÷ (CN¥4.3b - CN¥2.9b) (Based on the trailing twelve months to June 2024).

Therefore, L&K Engineering (Suzhou)Ltd has an ROCE of 33%. In absolute terms that's a great return and it's even better than the Construction industry average of 5.7%.

View our latest analysis for L&K Engineering (Suzhou)Ltd

Above you can see how the current ROCE for L&K Engineering (Suzhou)Ltd 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 L&K Engineering (Suzhou)Ltd .

What Does the ROCE Trend For L&K Engineering (Suzhou)Ltd Tell Us?

We like the trends that we're seeing from L&K Engineering (Suzhou)Ltd. The data shows that returns on capital have increased substantially over the last five years to 33%. Basically the business is earning more per dollar of capital invested and in addition to that, 32% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 66% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

The Bottom Line

To sum it up, L&K Engineering (Suzhou)Ltd has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a solid 53% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if L&K Engineering (Suzhou)Ltd can keep these trends up, it could have a bright future ahead.

On a final note, we've found 1 warning sign for L&K Engineering (Suzhou)Ltd that we think you should be aware of.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.