If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we’ll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. So when we looked at the ROCE trend of Kingfa Science & Technology (India) (NSE:KINGFA) we really liked what we saw.
Understanding Return On Capital Employed (ROCE)
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 Kingfa Science & Technology (India), this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.29 = ₹1.3b ÷ (₹9.2b – ₹4.9b) (Based on the trailing twelve months to December 2022).
Thus, Kingfa Science & Technology (India) has an ROCE of 29%. That’s a fantastic return and not only that, it outpaces the average of 16% earned by companies in a similar industry.
View 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’re interested in investigating Kingfa Science & Technology (India)’s past further, check out this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
Kingfa Science & Technology (India) is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 29%. The company is effectively making more money per dollar of capital used, and it’s worth noting that the amount of capital has increased too, by 39%. This can indicate that there’s plenty of opportunities to invest capital internally and at ever higher rates, a combination that’s common among multi-baggers.
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. The current liabilities has increased to 53% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that’s pretty high.
What We Can Learn From Kingfa Science & Technology (India)’s ROCE
In summary, it’s great to see that Kingfa Science & Technology (India) can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a staggering 101% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.
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.
