Keystone Electrical (Zhejiang)Ltd (SZSE:301448)’s capital allocation trends are not ideal

If you want to find potential multi-baggers, there are often underlying trends that can give you clues. Typically, you will want to look at growth trends. return Return on Invested Capital (ROCE) and associated expansion base It has invested over 100% of its invested capital. This shows that the company is a compounding machine and can continually reinvest earnings back into the business to generate higher returns. Keystone Electric (Zhejiang) Co., Ltd. (SZSE:301448) The return trend isn’t all that surprising, but let’s look a little more closely.

Understanding Return on Invested Capital (ROCE)

For those who don’t know, ROCE is a measure of a company’s annual pre-tax profit (revenue) relative to the capital employed in the business. The formula to calculate this metric for Keystone Electrical (Zhejiang)Ltd is:

Return on Invested Capital = Earnings Before Interest and Taxes (EBIT) ÷ (Total Assets – Current Liabilities)

0.069 = CN¥48 million ÷ (CN¥82.3 million – CN¥129 million) (Based on the trailing 12 months ending March 2024).

therefore, Keystone Electrical (Zhejiang)Ltd has an ROCE of 6.9%. While that’s a low return in absolute terms, it’s on par with the consumer durables industry average of 8.4%.

Check out our latest analysis for Keystone Electrical (Zhejiang) Ltd

Historical performance is a great starting point when researching a stock. Above you can see a graph comparing Keystone Electrical (Zhejiang) Ltd’s ROCE with its past earnings. If you want to delve deeper into past earnings, follow the link below. free A detailed graph showing Keystone Electrical (Zhejiang) Ltd.’s earnings and cash flow performance.

What does Keystone Electrical (Zhejiang)Ltd’s ROCE trend indicate?

Looking at Keystone Electrical (Zhejiang)Ltd’s ROCE trend doesn’t give us much confidence. Specifically, ROCE has been declining from 24% over the past five years. However, given that both revenue and the amount of assets deployed in the business are increasing, this could suggest that the company is investing in growth, leading to a short-term decline in ROCE as a result. And if the increased capital generates additional revenue, then in the long term the company, and therefore shareholders, will benefit.

As an aside, Keystone Electrical (Zhejiang)Ltd has managed to reduce its current liabilities to 16% of its total assets, which may be part of the reason for its lower ROCE. Additionally, this may reduce some of the risk in the business as the company’s suppliers and short-term creditors are funding a lower proportion of its operations. The company is essentially funding an increasing proportion of its operations with its own funds, which could make it less efficient at generating ROCE.

Keystone Electrical (Zhejiang) Ltd’s ROCE in brief

Keystone Electrical (Zhejiang) Ltd’s earnings have been declining recently, but it’s good to see that sales are growing and the company is reinvesting in the business. However, these trends don’t seem to be impacting the bottom line, as the stock’s total earnings have been roughly flat over the past year. As such, we recommend researching this stock further to explore what the other fundamentals of the business can tell us.

Nearly every business faces some risk, so it’s worth knowing what it is. 3 warning signs for Keystone Electrical (Zhejiang) Ltd (One of them is a bit uncomfortable!) Things you should know.

While Keystone Electrical (Zhejiang) Ltd may not be currently earning the highest return on equity, we have compiled a list of companies currently earning a return on equity above 25%. See here. free I’ll list them here.

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This article by Simply Wall St is general in nature. We use only unbiased methodologies to provide commentary based on historical data and analyst forecasts, and our articles are not intended as financial advice. It is not a recommendation to buy or sell stocks, and does not take into account your objectives, or your financial situation. We seek to provide long-term focused analysis driven by fundamental data. Note that our analysis may not take into account the latest price sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned.

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