Shenzhen Kingdom Sci-Tech (SHSE:600446) Will Want To Turn Around Its Return Trends

There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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 briefly looking over the numbers, we don't think Shenzhen Kingdom Sci-Tech (SHSE:600446) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. Analysts use this formula to calculate it for Shenzhen Kingdom Sci-Tech:

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

0.035 = CN¥130m ÷ (CN¥6.8b - CN¥3.0b) (Based on the trailing twelve months to September 2023).

Thus, Shenzhen Kingdom Sci-Tech has an ROCE of 3.5%. Even though it's in line with the industry average of 2.7%, it's still a low return by itself.

Check out our latest analysis for Shenzhen Kingdom Sci-Tech

Above you can see how the current ROCE for Shenzhen Kingdom Sci-Tech 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 Shenzhen Kingdom Sci-Tech .

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Shenzhen Kingdom Sci-Tech doesn't inspire confidence. Over the last five years, returns on capital have decreased to 3.5% from 10% five years ago. However it looks like Shenzhen Kingdom Sci-Tech might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Shenzhen Kingdom Sci-Tech's current liabilities are still rather high at 45% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Shenzhen Kingdom Sci-Tech's ROCE

To conclude, we've found that Shenzhen Kingdom Sci-Tech is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 43% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

On a separate note, we've found 1 warning sign for Shenzhen Kingdom Sci-Tech you'll probably want to know about.

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.