Shenzhen Kingdom Sci-Tech (SHSE:600446) Shareholders Will Want The ROCE Trajectory To Continue

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. So on that note, Shenzhen Kingdom Sci-Tech (SHSE:600446) looks quite promising in regards to its trends of return on capital.

What Is 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 Shenzhen Kingdom Sci-Tech, this is the formula:

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

0.046 = CN¥177m ÷ (CN¥5.9b - CN¥2.0b) (Based on the trailing twelve months to September 2024).

So, Shenzhen Kingdom Sci-Tech has an ROCE of 4.6%. On its own that's a low return, but compared to the average of 2.9% generated by the Software industry, it's much better.

Check out our latest analysis for Shenzhen Kingdom Sci-Tech

In the above chart we have measured Shenzhen Kingdom Sci-Tech'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 Shenzhen Kingdom Sci-Tech .

The Trend Of ROCE

We're delighted to see that Shenzhen Kingdom Sci-Tech is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 4.6% on its capital. In addition to that, Shenzhen Kingdom Sci-Tech is employing 50% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

The Key Takeaway

Long story short, we're delighted to see that Shenzhen Kingdom Sci-Tech's reinvestment activities have paid off and the company is now profitable. Considering the stock has delivered 7.2% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

On a final note, we've found 1 warning sign for Shenzhen Kingdom Sci-Tech that we think you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.