Investors Could Be Concerned With Kunshan TopA Intelligent EquipmentLtd's (SZSE:300836) Returns On Capital

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Kunshan TopA Intelligent EquipmentLtd (SZSE:300836) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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 TopA Intelligent EquipmentLtd, this is the formula:

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

0.008 = CN¥4.6m ÷ (CN¥934m - CN¥364m) (Based on the trailing twelve months to March 2024).

Thus, Kunshan TopA Intelligent EquipmentLtd has an ROCE of 0.8%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.6%.

Check out our latest analysis for Kunshan TopA Intelligent EquipmentLtd

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're interested in investigating Kunshan TopA Intelligent EquipmentLtd's past further, check out this free graph covering Kunshan TopA Intelligent EquipmentLtd's past earnings, revenue and cash flow.

What Can We Tell From Kunshan TopA Intelligent EquipmentLtd's ROCE Trend?

When we looked at the ROCE trend at Kunshan TopA Intelligent EquipmentLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 0.8% from 14% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From Kunshan TopA Intelligent EquipmentLtd's ROCE

While returns have fallen for Kunshan TopA Intelligent EquipmentLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has followed suit returning a meaningful 40% to shareholders over the last three years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

On a separate note, we've found 2 warning signs for Kunshan TopA Intelligent EquipmentLtd you'll probably want to know about.

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.

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