Some Investors May Be Worried About Shenzhen KTC Technology's (SZSE:001308) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Shenzhen KTC Technology (SZSE:001308) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on Shenzhen KTC Technology is:

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

0.14 = CN¥1.0b ÷ (CN¥16b - CN¥8.4b) (Based on the trailing twelve months to March 2024).

Therefore, Shenzhen KTC Technology has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Electronic industry average of 5.4% it's much better.

Check out our latest analysis for Shenzhen KTC Technology

In the above chart we have measured Shenzhen KTC Technology's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Shenzhen KTC Technology .

What Can We Tell From Shenzhen KTC Technology's ROCE Trend?

In terms of Shenzhen KTC Technology's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 30%, but since then they've fallen to 14%. 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.

Another thing to note, Shenzhen KTC Technology has a high ratio of current liabilities to total assets of 54%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Shenzhen KTC Technology's ROCE

While returns have fallen for Shenzhen KTC Technology in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 21% in the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One final note, you should learn about the 3 warning signs we've spotted with Shenzhen KTC Technology (including 1 which is concerning) .

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.