There Are Reasons To Feel Uneasy About Shenzhen Kinwong Electronic's (SHSE:603228) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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 Shenzhen Kinwong Electronic (SHSE:603228), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for Shenzhen Kinwong Electronic, this is the formula:

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

0.10 = CN¥1.3b ÷ (CN¥18b - CN¥5.3b) (Based on the trailing twelve months to June 2024).

So, Shenzhen Kinwong Electronic has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 5.4% generated by the Electronic industry.

See our latest analysis for Shenzhen Kinwong Electronic

Above you can see how the current ROCE for Shenzhen Kinwong Electronic 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 Kinwong Electronic .

The Trend Of ROCE

On the surface, the trend of ROCE at Shenzhen Kinwong Electronic doesn't inspire confidence. Over the last five years, returns on capital have decreased to 10% from 16% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Shenzhen Kinwong Electronic. However, total returns to shareholders over the last five years have been flat, which could indicate these growth trends potentially aren't accounted for yet by investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Shenzhen Kinwong Electronic does have some risks though, and we've spotted 3 warning signs for Shenzhen Kinwong Electronic that you might be interested in.

While Shenzhen Kinwong Electronic 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.