We Like These Underlying Return On Capital Trends At Shenzhen Kingdom Sci-Tech (SHSE:600446)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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.

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 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).

Therefore, Shenzhen Kingdom Sci-Tech has an ROCE of 4.6%. On its own that's a low return, but compared to the average of 2.3% generated by the Software industry, it's much better.

See 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 Does the ROCE Trend For Shenzhen Kingdom Sci-Tech Tell Us?

The fact that Shenzhen Kingdom Sci-Tech is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 4.6% on its capital. Not only that, but the company is utilizing 50% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

What We Can Learn From Shenzhen Kingdom Sci-Tech's ROCE

Overall, Shenzhen Kingdom Sci-Tech gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And since the stock has fallen 13% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation for 600446 that compares the share price and estimated value.

While Shenzhen Kingdom Sci-Tech 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.