Returns Are Gaining Momentum At Shenzhen Kaizhong Precision Technology (SZSE:002823)

There are a few key trends to look for if we want to identify the next multi-bagger. 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. 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, we've noticed some promising trends at Shenzhen Kaizhong Precision Technology (SZSE:002823) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Shenzhen Kaizhong Precision Technology, this is the formula:

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

0.09 = CN¥224m ÷ (CN¥3.6b - CN¥1.2b) (Based on the trailing twelve months to September 2024).

Thus, Shenzhen Kaizhong Precision Technology has an ROCE of 9.0%. In absolute terms, that's a low return, but it's much better than the Electrical industry average of 5.8%.

See our latest analysis for Shenzhen Kaizhong Precision Technology

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Shenzhen Kaizhong Precision Technology has performed in the past in other metrics, you can view this free graph of Shenzhen Kaizhong Precision Technology's past earnings, revenue and cash flow.

What Does the ROCE Trend For Shenzhen Kaizhong Precision Technology Tell Us?

Shenzhen Kaizhong Precision Technology is showing promise given that its ROCE is trending up and to the right. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 125% in that same time. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

Our Take On Shenzhen Kaizhong Precision Technology's ROCE

As discussed above, Shenzhen Kaizhong Precision Technology appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Considering the stock has delivered 35% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

Like most companies, Shenzhen Kaizhong Precision Technology does come with some risks, and we've found 3 warning signs 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.