Some Investors May Be Worried About Shanghai Kaytune IndustrialLtd's (SZSE:301001) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 Shanghai Kaytune IndustrialLtd (SZSE:301001) 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 Shanghai Kaytune IndustrialLtd, this is the formula:

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

0.017 = CN¥14m ÷ (CN¥908m - CN¥59m) (Based on the trailing twelve months to June 2024).

Thus, Shanghai Kaytune IndustrialLtd has an ROCE of 1.7%. In absolute terms, that's a low return and it also under-performs the Multiline Retail industry average of 4.2%.

See our latest analysis for Shanghai Kaytune IndustrialLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shanghai Kaytune IndustrialLtd's ROCE against it's prior returns. If you're interested in investigating Shanghai Kaytune IndustrialLtd's past further, check out this free graph covering Shanghai Kaytune IndustrialLtd's past earnings, revenue and cash flow.

What Can We Tell From Shanghai Kaytune IndustrialLtd's ROCE Trend?

In terms of Shanghai Kaytune IndustrialLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 1.7% from 39% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, Shanghai Kaytune IndustrialLtd has done well to pay down its current liabilities to 6.5% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Shanghai Kaytune IndustrialLtd's ROCE

We're a bit apprehensive about Shanghai Kaytune IndustrialLtd because despite more capital being deployed in the business, returns on that capital and sales have both fallen. It should come as no surprise then that the stock has fallen 31% over the last three years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a final note, we found 3 warning signs for Shanghai Kaytune IndustrialLtd (2 are significant) you should be aware of.

While Shanghai Kaytune IndustrialLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.