We're Watching These Trends At Kingfa Science & Technology (India) (NSE:KINGFA)

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. 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.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed 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)

0.043 = ₹162m ÷ (₹6.1b - ₹2.3b) (Based on the trailing twelve months to December 2020).

Thus, Kingfa Science & Technology (India) has an ROCE of 4.3%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 15%.

See 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 want to delve into the historical earnings, revenue and cash flow of Kingfa Science & Technology (India), check out these free graphs here.

What The Trend Of ROCE Can Tell Us

In terms of Kingfa Science & Technology (India)'s historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 19%, but since then they've fallen to 4.3%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

What We Can Learn From Kingfa Science & Technology (India)'s ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Kingfa Science & Technology (India) 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 23% from where it was three years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing, we've spotted 1 warning sign facing Kingfa Science & Technology (India) that you might find interesting.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

When trading Kingfa Science & Technology (India) or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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