Zhuhai Kles Technologyco.Ltd (SZSE:301314) Is Reinvesting At Lower Rates Of Return

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after briefly looking over the numbers, we don't think Zhuhai Kles Technologyco.Ltd (SZSE:301314) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. To calculate this metric for Zhuhai Kles Technologyco.Ltd, this is the formula:

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

0.0082 = CN¥9.0m ÷ (CN¥1.1b - CN¥57m) (Based on the trailing twelve months to June 2024).

So, Zhuhai Kles Technologyco.Ltd has an ROCE of 0.8%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 5.4%.

See our latest analysis for Zhuhai Kles Technologyco.Ltd

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

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Zhuhai Kles Technologyco.Ltd doesn't inspire confidence. To be more specific, ROCE has fallen from 56% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a related note, Zhuhai Kles Technologyco.Ltd has decreased its current liabilities to 4.9% 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...

From the above analysis, we find it rather worrisome that returns on capital and sales for Zhuhai Kles Technologyco.Ltd have fallen, meanwhile the business is employing more capital than it was five years ago. Investors haven't taken kindly to these developments, since the stock has declined 18% from where it was year ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you want to know some of the risks facing Zhuhai Kles Technologyco.Ltd we've found 2 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.

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.