Returns Are Gaining Momentum At INKON Life Technology (SZSE:300143)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Speaking of which, we noticed some great changes in INKON Life Technology's (SZSE:300143) returns on capital, so let's have a look.

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 INKON Life Technology, this is the formula:

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

0.068 = CN¥117m ÷ (CN¥2.5b - CN¥794m) (Based on the trailing twelve months to June 2024).

Therefore, INKON Life Technology has an ROCE of 6.8%. In absolute terms, that's a low return and it also under-performs the Healthcare industry average of 8.7%.

View our latest analysis for INKON Life Technology

In the above chart we have measured INKON Life Technology's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering INKON Life Technology for free.

What The Trend Of ROCE Can Tell Us

INKON Life Technology has not disappointed in regards to ROCE growth. The data shows that returns on capital have increased by 41% over the trailing five years. The company is now earning CN¥0.07 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 30% less capital than it was five years ago. INKON Life Technology may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 32% of its operations, which isn't ideal. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

The Key Takeaway

In summary, it's great to see that INKON Life Technology has been able to turn things around and earn higher returns on lower amounts of capital. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 0.2% to shareholders. So with that in mind, we think the stock deserves further research.

One more thing, we've spotted 1 warning sign facing INKON Life Technology that you might find interesting.

While INKON Life Technology 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.