Zhuhai Kles Technologyco.Ltd's (SZSE:301314) Returns On Capital Not Reflecting Well On The Business

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. In light of that, when we looked at Zhuhai Kles Technologyco.Ltd (SZSE:301314) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

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 Zhuhai Kles Technologyco.Ltd, this is the formula:

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

0.0069 = CN¥7.6m ÷ (CN¥1.2b - CN¥62m) (Based on the trailing twelve months to September 2024).

Thus, Zhuhai Kles Technologyco.Ltd has an ROCE of 0.7%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.5%.

View 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 47% over the last five years. 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Zhuhai Kles Technologyco.Ltd has decreased its current liabilities to 5.4% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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.

The Bottom Line

To conclude, we've found that Zhuhai Kles Technologyco.Ltd is reinvesting in the business, but returns have been falling. Since the stock has declined 23% over the last year, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Zhuhai Kles Technologyco.Ltd has the makings of a multi-bagger.

One more thing: We've identified 2 warning signs with Zhuhai Kles Technologyco.Ltd (at least 1 which is significant) , and understanding these would certainly be useful.

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.