Shenzhen Kaifa Technology's (SZSE:000021) Returns On Capital Are Heading Higher

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. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Shenzhen Kaifa Technology (SZSE:000021) and its trend of ROCE, we really liked what we saw.

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 Shenzhen Kaifa Technology:

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

0.068 = CN¥1.1b ÷ (CN¥29b - CN¥13b) (Based on the trailing twelve months to September 2024).

Therefore, Shenzhen Kaifa Technology has an ROCE of 6.8%. In absolute terms, that's a low return, but it's much better than the Electronic industry average of 5.6%.

View our latest analysis for Shenzhen Kaifa Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shenzhen Kaifa Technology's ROCE against it's prior returns. If you'd like to look at how Shenzhen Kaifa Technology has performed in the past in other metrics, you can view this free graph of Shenzhen Kaifa Technology's past earnings, revenue and cash flow.

What Does the ROCE Trend For Shenzhen Kaifa Technology Tell Us?

Shenzhen Kaifa Technology has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 6.8% on its capital. Not only that, but the company is utilizing 134% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

On a related note, the company's ratio of current liabilities to total assets has decreased to 45%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Shenzhen Kaifa Technology has grown its returns without a reliance on increasing their current liabilities, which we're very happy with. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.

What We Can Learn From Shenzhen Kaifa Technology's ROCE

Long story short, we're delighted to see that Shenzhen Kaifa Technology's reinvestment activities have paid off and the company is now profitable. Considering the stock has delivered 25% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

One more thing, we've spotted 1 warning sign facing Shenzhen Kaifa Technology that you might find interesting.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.