Kennede Electronics MFG (SZSE:002723) Is Experiencing Growth In Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. With that in mind, we've noticed some promising trends at Kennede Electronics MFG (SZSE:002723) so let's look a bit deeper.

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. To calculate this metric for Kennede Electronics MFG, this is the formula:

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

0.024 = CN¥34m ÷ (CN¥2.9b - CN¥1.4b) (Based on the trailing twelve months to September 2024).

So, Kennede Electronics MFG has an ROCE of 2.4%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 5.8%.

View our latest analysis for Kennede Electronics MFG

Historical performance is a great place to start when researching a stock so above you can see the gauge for Kennede Electronics MFG's ROCE against it's prior returns. If you'd like to look at how Kennede Electronics MFG has performed in the past in other metrics, you can view this free graph of Kennede Electronics MFG's past earnings, revenue and cash flow.

What Can We Tell From Kennede Electronics MFG's ROCE Trend?

The fact that Kennede Electronics MFG is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 2.4% on its capital. Not only that, but the company is utilizing 130% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 50% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

The Key Takeaway

Overall, Kennede Electronics MFG gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 23% to shareholders. So with that in mind, we think the stock deserves further research.

If you'd like to know about the risks facing Kennede Electronics MFG, we've discovered 1 warning sign that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.