Kunshan Kinglai Hygienic MaterialsLtd (SZSE:300260) Is Doing The Right Things To Multiply Its Share Price

There are a few key trends to look for if we want to identify the next 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Kunshan Kinglai Hygienic MaterialsLtd (SZSE:300260) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Kunshan Kinglai Hygienic MaterialsLtd is:

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

0.13 = CN¥307m ÷ (CN¥4.2b - CN¥1.9b) (Based on the trailing twelve months to September 2023).

So, 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 6.0% it's much better.

View our latest analysis for Kunshan Kinglai Hygienic MaterialsLtd

In the above chart we have measured Kunshan Kinglai Hygienic MaterialsLtd'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 Kunshan Kinglai Hygienic MaterialsLtd for free.

How Are Returns Trending?

Kunshan Kinglai Hygienic MaterialsLtd is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 13%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 141%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a separate but related note, it's important to know that Kunshan Kinglai Hygienic MaterialsLtd has a current liabilities to total assets ratio of 45%, which we'd consider pretty high. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

In summary, it's great to see that Kunshan Kinglai Hygienic MaterialsLtd 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. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you want to continue researching Kunshan Kinglai Hygienic MaterialsLtd, you might be interested to know about the 2 warning signs that our analysis has discovered.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.