Returns On Capital Signal Tricky Times Ahead For Konfoong Materials International (SZSE:300666)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Konfoong Materials International (SZSE:300666), it didn't seem to tick all of these boxes.

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. Analysts use this formula to calculate it for Konfoong Materials International:

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

0.052 = CN¥256m ÷ (CN¥5.7b - CN¥760m) (Based on the trailing twelve months to September 2023).

Thus, Konfoong Materials International has an ROCE of 5.2%. Even though it's in line with the industry average of 5.3%, it's still a low return by itself.

See our latest analysis for Konfoong Materials International

Above you can see how the current ROCE for Konfoong Materials International compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Konfoong Materials International .

How Are Returns Trending?

On the surface, the trend of ROCE at Konfoong Materials International doesn't inspire confidence. Around five years ago the returns on capital were 10%, but since then they've fallen to 5.2%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Konfoong Materials International has decreased its current liabilities to 13% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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.

The Bottom Line

While returns have fallen for Konfoong Materials International in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. In light of this, the stock has only gained 6.0% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

Konfoong Materials International could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 300666 on our platform quite valuable.

While Konfoong Materials International 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.