Kingfa Science & Technology (India) (NSE:KINGFA) Is Very Good At Capital Allocation

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. And in light of that, the trends we're seeing at Kingfa Science & Technology (India)'s (NSE:KINGFA) look very promising so lets take a look.

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

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 Kingfa Science & Technology (India) is:

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

0.25 = ₹1.1b ÷ (₹9.2b - ₹4.9b) (Based on the trailing twelve months to September 2022).

Thus, Kingfa Science & Technology (India) has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 17%.

View our latest analysis for Kingfa Science & Technology (India)

Historical performance is a great place to start when researching a stock so above you can see the gauge for Kingfa Science & Technology (India)'s ROCE against it's prior returns. If you're interested in investigating Kingfa Science & Technology (India)'s past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Kingfa Science & Technology (India) Tell Us?

The trends we've noticed at Kingfa Science & Technology (India) are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 25%. The amount of capital employed has increased too, by 39%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 53% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

In Conclusion...

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Kingfa Science & Technology (India) has. Since the stock has returned a solid 43% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Kingfa Science & Technology (India) can keep these trends up, it could have a bright future ahead.

Kingfa Science & Technology (India) does have some risks though, and we've spotted 1 warning sign for Kingfa Science & Technology (India) that you might be interested in.

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.