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. However, after briefly looking over the numbers, we don't think Kinco Automation (Shanghai)Ltd (SHSE:688160) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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)
0.048 = CN¥38m ÷ (CN¥1.0b - CN¥247m) (Based on the trailing twelve months to September 2024).
So, Kinco Automation (Shanghai)Ltd has an ROCE of 4.8%. On its own, that's a low figure but it's around the 5.5% 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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Kinco Automation (Shanghai)Ltd.
How Are Returns Trending?
The trend of ROCE doesn't look fantastic because it's fallen from 20% five years ago, while the business's capital employed increased by 229%. That being said, Kinco Automation (Shanghai)Ltd raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Kinco Automation (Shanghai)Ltd probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.
In Conclusion...
To conclude, we've found that Kinco Automation (Shanghai)Ltd is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 61% over the last three years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
Kinco Automation (Shanghai)Ltd does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...
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.
