There Are Reasons To Feel Uneasy About Chengdu KSW TechnologiesLtd's (SHSE:688283) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Chengdu KSW TechnologiesLtd (SHSE:688283) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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. The formula for this calculation on Chengdu KSW TechnologiesLtd is:

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

0.052 = CN¥52m ÷ (CN¥1.1b - CN¥85m) (Based on the trailing twelve months to June 2024).

Thus, Chengdu KSW TechnologiesLtd has an ROCE of 5.2%. In absolute terms, that's a low return but it's around the Communications industry average of 4.4%.

Check out our latest analysis for Chengdu KSW TechnologiesLtd

Above you can see how the current ROCE for Chengdu KSW TechnologiesLtd 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 Chengdu KSW TechnologiesLtd .

What Can We Tell From Chengdu KSW TechnologiesLtd's ROCE Trend?

When we looked at the ROCE trend at Chengdu KSW TechnologiesLtd, we didn't gain much confidence. To be more specific, ROCE has fallen from 37% over the last five years. However it looks like Chengdu KSW TechnologiesLtd 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, Chengdu KSW TechnologiesLtd has done well to pay down its current liabilities to 7.8% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

In Conclusion...

To conclude, we've found that Chengdu KSW TechnologiesLtd is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 59% in the last year. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Chengdu KSW TechnologiesLtd does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is significant...

While Chengdu KSW TechnologiesLtd 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.