Be Wary Of Shenzhen King Brother Electronics TechnologyLtd (SZSE:301041) And Its Returns On Capital

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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Shenzhen King Brother Electronics TechnologyLtd (SZSE:301041) and its ROCE trend, we weren't exactly thrilled.

What Is 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. To calculate this metric for Shenzhen King Brother Electronics TechnologyLtd, this is the formula:

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

0.025 = CN¥17m ÷ (CN¥897m - CN¥209m) (Based on the trailing twelve months to September 2024).

Thus, Shenzhen King Brother Electronics TechnologyLtd has an ROCE of 2.5%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 5.8%.

View our latest analysis for Shenzhen King Brother Electronics TechnologyLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Shenzhen King Brother Electronics TechnologyLtd has performed in the past in other metrics, you can view this free graph of Shenzhen King Brother Electronics TechnologyLtd's past earnings, revenue and cash flow.

So How Is Shenzhen King Brother Electronics TechnologyLtd's ROCE Trending?

In terms of Shenzhen King Brother Electronics TechnologyLtd's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 14%, but since then they've fallen to 2.5%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Shenzhen King Brother Electronics TechnologyLtd's ROCE

In summary, Shenzhen King Brother Electronics TechnologyLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And with the stock having returned a mere 13% in the last three years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with Shenzhen King Brother Electronics TechnologyLtd (including 1 which is potentially serious) .

While Shenzhen King Brother Electronics TechnologyLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.