Shanghai SK Automation TechnologyLtd (SHSE:688155) Could Be Struggling To Allocate Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. In light of that, when we looked at Shanghai SK Automation TechnologyLtd (SHSE:688155) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Shanghai SK Automation TechnologyLtd, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.11 = CN¥327m ÷ (CN¥5.0b - CN¥2.0b) (Based on the trailing twelve months to June 2024).

Therefore, Shanghai SK Automation TechnologyLtd has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Auto Components industry average of 7.3% it's much better.

Check out our latest analysis for Shanghai SK Automation TechnologyLtd

Above you can see how the current ROCE for Shanghai SK Automation TechnologyLtd 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 analyst report for Shanghai SK Automation TechnologyLtd .

What Can We Tell From Shanghai SK Automation TechnologyLtd's ROCE Trend?

Unfortunately, the trend isn't great with ROCE falling from 15% five years ago, while capital employed has grown 713%. That being said, Shanghai SK Automation TechnologyLtd raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Shanghai SK Automation TechnologyLtd might not have received a full period of earnings contribution from it.

Our Take On Shanghai SK Automation TechnologyLtd's ROCE

To conclude, we've found that Shanghai SK Automation TechnologyLtd is reinvesting in the business, but returns have been falling. And in the last three years, the stock has given away 40% 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 Shanghai SK Automation TechnologyLtd has the makings of a multi-bagger.

Shanghai SK Automation TechnologyLtd does have some risks though, and we've spotted 2 warning signs for Shanghai SK Automation TechnologyLtd that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.