Shenzhen KTC Technology (SZSE:001308) Will Be Hoping To Turn Its Returns On Capital Around

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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Although, when we looked at Shenzhen KTC Technology (SZSE:001308), it didn't seem to tick all of these boxes.

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 KTC Technology, this is the formula:

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

0.13 = CN¥953m ÷ (CN¥16b - CN¥9.0b) (Based on the trailing twelve months to September 2024).

Therefore, Shenzhen KTC Technology has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Electronic industry average of 5.5% it's much better.

Check out our latest analysis for Shenzhen KTC Technology

Above you can see how the current ROCE for Shenzhen KTC Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Shenzhen KTC Technology for free.

How Are Returns Trending?

When we looked at the ROCE trend at Shenzhen KTC Technology, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 13% from 30% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Shenzhen KTC Technology's current liabilities are still rather high at 56% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

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 KTC Technology. These trends are starting to be recognized by investors since the stock has delivered a 0.03% gain to shareholders who've held over the last year. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

If you'd like to know more about Shenzhen KTC Technology, we've spotted 3 warning signs, and 1 of them makes us a bit uncomfortable.

While Shenzhen KTC Technology 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.