Kingfa Science & Technology (India)'s (NSE:KINGFA) Returns On Capital Not Reflecting Well On The Business

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Having said that, from a first glance at Kingfa Science & Technology (India) (NSE:KINGFA) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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 Kingfa Science & Technology (India) is:

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

0.13 = ₹526m ÷ (₹7.6b - ₹3.6b) (Based on the trailing twelve months to December 2021).

Thus, Kingfa Science & Technology (India) has an ROCE of 13%. In absolute terms, that's a pretty standard return but compared to the Chemicals industry average it falls behind.

Check out our latest analysis for Kingfa Science & Technology (India)

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 Kingfa Science & Technology (India) has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Kingfa Science & Technology (India)'s ROCE Trend?

When we looked at the ROCE trend at Kingfa Science & Technology (India), we didn't gain much confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 13%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Kingfa Science & Technology (India)'s current liabilities are still rather high at 47% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Kingfa Science & Technology (India) is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 26% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

One more thing to note, we've identified 1 warning sign with Kingfa Science & Technology (India) and understanding this should be part of your investment process.

While Kingfa Science & Technology (India) isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.