If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at KSEC Intelligent Technology (SZSE:301311) and its ROCE trend, we weren't exactly thrilled.
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. Analysts use this formula to calculate it for KSEC Intelligent Technology:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.022 = CN¥52m ÷ (CN¥4.4b - CN¥2.1b) (Based on the trailing twelve months to September 2023).
So, KSEC Intelligent Technology has an ROCE of 2.2%. Ultimately, that's a low return and it under-performs the Machinery industry average of 6.2%.
View our latest analysis for KSEC Intelligent Technology
Historical performance is a great place to start when researching a stock so above you can see the gauge for KSEC Intelligent Technology's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of KSEC Intelligent Technology, check out these free graphs here.
The Trend Of ROCE
On the surface, the trend of ROCE at KSEC Intelligent Technology doesn't inspire confidence. Around four years ago the returns on capital were 12%, but since then they've fallen to 2.2%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
On a side note, KSEC Intelligent Technology has done well to pay down its current liabilities to 48% of total assets. That could partly explain why the ROCE has dropped. 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. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.
Our Take On KSEC Intelligent Technology's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that KSEC Intelligent Technology is reinvesting for growth and has higher sales as a result. These trends are starting to be recognized by investors since the stock has delivered a 4.3% gain to shareholders who've held over the last year. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.
KSEC Intelligent Technology does have some risks though, and we've spotted 1 warning sign for KSEC Intelligent Technology that you might be interested in.
While KSEC Intelligent Technology may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.