The Return Trends At Guangdong Kingstrong Technology (SZSE:300629) Look Promising

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Guangdong Kingstrong Technology (SZSE:300629) looks quite promising in regards to its trends of return on capital.

What Is 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. The formula for this calculation on Guangdong Kingstrong Technology is:

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

0.12 = CN¥220m ÷ (CN¥2.0b - CN¥165m) (Based on the trailing twelve months to March 2024).

Thus, Guangdong Kingstrong Technology has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Building industry average of 6.9% it's much better.

View our latest analysis for Guangdong Kingstrong Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Guangdong Kingstrong Technology's ROCE against it's prior returns. 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.

So How Is Guangdong Kingstrong Technology's ROCE Trending?

The fact that Guangdong Kingstrong Technology is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 12% on its capital. And unsurprisingly, like most companies trying to break into the black, Guangdong Kingstrong Technology is utilizing 378% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 8.3%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Key Takeaway

Long story short, we're delighted to see that Guangdong Kingstrong Technology's reinvestment activities have paid off and the company is now profitable. Since the stock has returned a staggering 102% to shareholders over the last five years, it looks like investors are recognizing these changes. 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.

While Guangdong Kingstrong Technology isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.