Investors Will Want Kunshan Kinglai Hygienic MaterialsLtd's (SZSE:300260) Growth In ROCE To Persist

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Kunshan Kinglai Hygienic MaterialsLtd (SZSE:300260) and its trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Kunshan Kinglai Hygienic MaterialsLtd, this is the formula:

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

0.13 = CN¥311m ÷ (CN¥4.5b - CN¥2.1b) (Based on the trailing twelve months to March 2024).

Thus, Kunshan Kinglai Hygienic MaterialsLtd has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 5.6% it's much better.

See our latest analysis for Kunshan Kinglai Hygienic MaterialsLtd

Above you can see how the current ROCE for Kunshan Kinglai Hygienic MaterialsLtd 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 Kunshan Kinglai Hygienic MaterialsLtd .

What Can We Tell From Kunshan Kinglai Hygienic MaterialsLtd's ROCE Trend?

The trends we've noticed at Kunshan Kinglai Hygienic MaterialsLtd are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 13%. The amount of capital employed has increased too, by 156%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a side note, Kunshan Kinglai Hygienic MaterialsLtd's current liabilities are still rather high at 48% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Kunshan Kinglai Hygienic MaterialsLtd's ROCE

All in all, it's terrific to see that Kunshan Kinglai Hygienic MaterialsLtd is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 272% 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.

If you want to continue researching Kunshan Kinglai Hygienic MaterialsLtd, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Kunshan Kinglai Hygienic MaterialsLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.