Some Investors May Be Worried About 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? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Qingdao KutesmartLtd (SZSE:300840) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. Analysts use this formula to calculate it for Qingdao KutesmartLtd:

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).

Therefore, Qingdao KutesmartLtd has an ROCE of 8.7%. On its own that's a low return, but compared to the average of 6.8% generated by the Luxury industry, it's much better.

View 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're interested, you can view the analysts predictions in our free analyst report for Qingdao KutesmartLtd .

The Trend Of ROCE

On the surface, the trend of ROCE at Qingdao KutesmartLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 8.7% from 13% 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. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From Qingdao KutesmartLtd's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Qingdao KutesmartLtd is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 11% in the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

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

While Qingdao KutesmartLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.