Shenzhen KSTAR Science and Technology (SZSE:002518) Knows How To Allocate Capital Effectively

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, the ROCE of Shenzhen KSTAR Science and Technology (SZSE:002518) looks great, so lets see what the trend can tell us.

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 Shenzhen KSTAR Science and Technology:

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

0.24 = CN¥1.1b ÷ (CN¥6.9b - CN¥2.5b) (Based on the trailing twelve months to September 2023).

Thus, Shenzhen KSTAR Science and Technology has an ROCE of 24%. That's a fantastic return and not only that, it outpaces the average of 6.3% earned by companies in a similar industry.

See our latest analysis for Shenzhen KSTAR Science and Technology

In the above chart we have measured Shenzhen KSTAR Science and Technology's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Shenzhen KSTAR Science and Technology for free.

The Trend Of ROCE

Shenzhen KSTAR Science and Technology is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 24%. Basically the business is earning more per dollar of capital invested and in addition to that, 72% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

In Conclusion...

In summary, it's great to see that Shenzhen KSTAR Science and Technology can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a staggering 104% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing to note, we've identified 1 warning sign with Shenzhen KSTAR Science and Technology and understanding it should be part of your investment process.

Shenzhen KSTAR Science and Technology is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.