Investors Could Be Concerned With Guangdong KinLong Hardware ProductsLtd's (SZSE:002791) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Guangdong KinLong Hardware ProductsLtd (SZSE:002791) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

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 Guangdong KinLong Hardware ProductsLtd:

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

0.043 = CN¥269m ÷ (CN¥10b - CN¥3.9b) (Based on the trailing twelve months to September 2024).

So, Guangdong KinLong Hardware ProductsLtd has an ROCE of 4.3%. Ultimately, that's a low return and it under-performs the Building industry average of 7.8%.

Check out our latest analysis for Guangdong KinLong Hardware ProductsLtd

Above you can see how the current ROCE for Guangdong KinLong Hardware ProductsLtd 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 Guangdong KinLong Hardware ProductsLtd .

What Can We Tell From Guangdong KinLong Hardware ProductsLtd's ROCE Trend?

In terms of Guangdong KinLong Hardware ProductsLtd's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 10% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Guangdong KinLong Hardware ProductsLtd's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 59% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Guangdong KinLong Hardware ProductsLtd has the makings of a multi-bagger.

If you're still interested in Guangdong KinLong Hardware ProductsLtd it's worth checking out our FREE intrinsic value approximation for 002791 to see if it's trading at an attractive price in other respects.

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.