Guangdong Kingstrong Technology (SZSE:300629) Shareholders Will Want The ROCE Trajectory To Continue

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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Guangdong Kingstrong Technology (SZSE:300629) 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. To calculate this metric for Guangdong Kingstrong Technology, this is the formula:

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

0.098 = CN¥185m ÷ (CN¥2.1b - CN¥183m) (Based on the trailing twelve months to September 2024).

So, Guangdong Kingstrong Technology has an ROCE of 9.8%. In absolute terms, that's a low return, but it's much better than the Building industry average of 7.3%.

Check out our latest analysis for Guangdong Kingstrong 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 Guangdong Kingstrong Technology has performed in the past in other metrics, you can view this free graph of Guangdong Kingstrong Technology's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

The fact that Guangdong Kingstrong Technology is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 9.8% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Guangdong Kingstrong Technology is utilizing 114% more capital than it was five years ago. 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.

One more thing to note, Guangdong Kingstrong Technology has decreased current liabilities to 8.8% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

In Conclusion...

To the delight of most shareholders, Guangdong Kingstrong Technology has now broken into profitability. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

On a separate note, we've found 1 warning sign for Guangdong Kingstrong Technology you'll probably want to know about.

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.

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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.