Investors Could Be Concerned With Qingdao KutesmartLtd's (SZSE:300840) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. However, after briefly looking over the numbers, we don't think Qingdao KutesmartLtd (SZSE:300840) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

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. To calculate this metric for Qingdao KutesmartLtd, this is the formula:

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

0.087 = CN¥118m ÷ (CN¥1.8b - CN¥418m) (Based on the trailing twelve months to March 2024).

So, Qingdao KutesmartLtd has an ROCE of 8.7%. In absolute terms, that's a low return, but it's much better than the Luxury industry average of 6.5%.

Check out our latest analysis for Qingdao KutesmartLtd

In the above chart we have measured Qingdao KutesmartLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Qingdao KutesmartLtd .

What Can We Tell From Qingdao KutesmartLtd's ROCE Trend?

When we looked at the ROCE trend at Qingdao KutesmartLtd, we didn't gain much confidence. Around five years ago the returns on capital were 13%, but since then they've fallen to 8.7%. 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. If these investments prove successful, this can bode very well for long term stock performance.

The Key Takeaway

While returns have fallen for Qingdao KutesmartLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, despite the promising trends, the stock has fallen 21% over the last three years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Qingdao KutesmartLtd (of which 1 is a bit unpleasant!) that you should 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.