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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Kinco Automation (Shanghai)Ltd (SHSE:688160) and its ROCE trend, we weren't exactly thrilled.
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 Kinco Automation (Shanghai)Ltd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.082 = CN¥63m ÷ (CN¥917m - CN¥150m) (Based on the trailing twelve months to September 2023).
So, Kinco Automation (Shanghai)Ltd has an ROCE of 8.2%. On its own that's a low return, but compared to the average of 5.0% generated by the Electronic industry, it's much better.
See our latest analysis for Kinco Automation (Shanghai)Ltd
Above you can see how the current ROCE for Kinco Automation (Shanghai)Ltd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Kinco Automation (Shanghai)Ltd.
So How Is Kinco Automation (Shanghai)Ltd's ROCE Trending?
On the surface, the trend of ROCE at Kinco Automation (Shanghai)Ltd doesn't inspire confidence. To be more specific, ROCE has fallen from 20% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.
In Conclusion...
Bringing it all together, while we're somewhat encouraged by Kinco Automation (Shanghai)Ltd's reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 28% over the last three years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
If you'd like to know about the risks facing Kinco Automation (Shanghai)Ltd, we've discovered 2 warning signs that you should be aware of.
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.
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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.