Qingdao Kingking Applied Chemistry (SZSE:002094) Hasn't Managed To Accelerate Its Returns

If you're looking for a multi-bagger, there's a few things to 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Qingdao Kingking Applied Chemistry (SZSE:002094), we don't think it's current trends fit the mold of a multi-bagger.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Qingdao Kingking Applied Chemistry, this is the formula:

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

0.053 = CN¥82m ÷ (CN¥3.5b - CN¥1.9b) (Based on the trailing twelve months to September 2024).

Thus, Qingdao Kingking Applied Chemistry has an ROCE of 5.3%. On its own, that's a low figure but it's around the 6.6% average generated by the Personal Products industry.

View our latest analysis for Qingdao Kingking Applied Chemistry

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Qingdao Kingking Applied Chemistry.

What Can We Tell From Qingdao Kingking Applied Chemistry's ROCE Trend?

Over the past five years, Qingdao Kingking Applied Chemistry's ROCE has remained relatively flat while the business is using 60% less capital than before. When a company effectively decreases its assets base, it's not usually a sign to be optimistic on that company. In addition to that, since the ROCE doesn't scream "quality" at 5.3%, it's hard to get excited about these developments.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 56% of total assets, this reported ROCE would probably be less than5.3% because total capital employed would be higher.The 5.3% ROCE could be even lower if current liabilities weren't 56% of total assets, because the the formula would show a larger base of total capital employed. So with current liabilities at such high levels, this effectively means the likes of suppliers or short-term creditors are funding a meaningful part of the business, which in some instances can bring some risks.

Our Take On Qingdao Kingking Applied Chemistry's ROCE

Overall, we're not ecstatic to see Qingdao Kingking Applied Chemistry reducing the amount of capital it employs in the business. And with the stock having returned a mere 14% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

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

While Qingdao Kingking Applied Chemistry 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.