To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Kinco Automation (Shanghai)Ltd (SHSE:688160), we don't think it's current trends fit the mold of a multi-bagger.
What Is 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 Kinco Automation (Shanghai)Ltd, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.061 = CN¥48m ÷ (CN¥930m - CN¥144m) (Based on the trailing twelve months to March 2024).
Therefore, Kinco Automation (Shanghai)Ltd has an ROCE of 6.1%. On its own, that's a low figure but it's around the 5.2% average generated by the Electronic industry.
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 Kinco Automation (Shanghai)Ltd's past further, check out this free graph covering Kinco Automation (Shanghai)Ltd's past earnings, revenue and cash flow.
The Trend Of ROCE
We weren't thrilled with the trend because Kinco Automation (Shanghai)Ltd's ROCE has reduced by 69% over the last five years, while the business employed 253% more capital. Usually this isn't ideal, but given Kinco Automation (Shanghai)Ltd conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Kinco Automation (Shanghai)Ltd might not have received a full period of earnings contribution from it.
The Bottom Line
In summary, Kinco Automation (Shanghai)Ltd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And in the last three years, the stock has given away 20% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Kinco Automation (Shanghai)Ltd has the makings of a multi-bagger.
If you want to continue researching Kinco Automation (Shanghai)Ltd, you might be interested to know about the 3 warning signs that our analysis has discovered.
While Kinco Automation (Shanghai)Ltd 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
