L&K Engineering (Suzhou)Ltd (SHSE:603929) Knows How To Allocate Capital Effectively

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. And in light of that, the trends we're seeing at L&K Engineering (Suzhou)Ltd's (SHSE:603929) look very promising so lets take a look.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)

0.34 = CN¥574m ÷ (CN¥4.5b - CN¥2.8b) (Based on the trailing twelve months to September 2024).

Therefore, L&K Engineering (Suzhou)Ltd has an ROCE of 34%. In absolute terms that's a great return and it's even better than the Construction industry average of 6.1%.

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

In the above chart we have measured L&K Engineering (Suzhou)Ltd's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for L&K Engineering (Suzhou)Ltd .

What The Trend Of ROCE Can Tell Us

The trends we've noticed at L&K Engineering (Suzhou)Ltd are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 34%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 47%. 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 62% 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 On L&K Engineering (Suzhou)Ltd's ROCE

All in all, it's terrific to see that L&K Engineering (Suzhou)Ltd is reaping the rewards from prior investments and is growing its capital base. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Like most companies, L&K Engineering (Suzhou)Ltd does come with some risks, and we've found 1 warning sign that you should be aware of.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.