The Returns On Capital At Chengdu KSW TechnologiesLtd (SHSE:688283) Don't Inspire Confidence

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. In light of that, when we looked at Chengdu KSW TechnologiesLtd (SHSE:688283) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Chengdu KSW TechnologiesLtd:

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

0.062 = CN¥62m ÷ (CN¥1.1b - CN¥61m) (Based on the trailing twelve months to March 2024).

So, Chengdu KSW TechnologiesLtd has an ROCE of 6.2%. On its own that's a low return, but compared to the average of 3.9% generated by the Communications industry, it's much better.

View our latest analysis for Chengdu KSW TechnologiesLtd

In the above chart we have measured Chengdu KSW TechnologiesLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Chengdu KSW TechnologiesLtd for free.

The Trend Of ROCE

On the surface, the trend of ROCE at Chengdu KSW TechnologiesLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 6.2% from 33% 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.

On a side note, Chengdu KSW TechnologiesLtd has done well to pay down its current liabilities to 5.7% of total assets. That could partly explain why the ROCE has dropped. 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

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 Chengdu KSW TechnologiesLtd. These growth trends haven't led to growth returns though, since the stock has fallen 45% over the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

If you'd like to know about the risks facing Chengdu KSW TechnologiesLtd, we've discovered 1 warning sign that 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.

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