Capital Allocation Trends At Keli Sensing Technology (Ningbo)Ltd (SHSE:603662) Aren't Ideal

If you're looking for a multi-bagger, there's a few things to 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. However, after investigating Keli Sensing Technology (Ningbo)Ltd (SHSE:603662), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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 Keli Sensing Technology (Ningbo)Ltd, this is the formula:

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

0.083 = CN¥219m ÷ (CN¥3.8b - CN¥1.2b) (Based on the trailing twelve months to September 2023).

Therefore, Keli Sensing Technology (Ningbo)Ltd has an ROCE of 8.3%. In absolute terms, that's a low return, but it's much better than the Electrical industry average of 6.5%.

Check out our latest analysis for Keli Sensing Technology (Ningbo)Ltd

In the above chart we have measured Keli Sensing Technology (Ningbo)Ltd's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Keli Sensing Technology (Ningbo)Ltd .

The Trend Of ROCE

In terms of Keli Sensing Technology (Ningbo)Ltd's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 11%, but since then they've fallen to 8.3%. 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.

Our Take On Keli Sensing Technology (Ningbo)Ltd's ROCE

In summary, Keli Sensing Technology (Ningbo)Ltd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has gained an impressive 92% over the last three years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

On a final note, we've found 3 warning signs for Keli Sensing Technology (Ningbo)Ltd that we think you should be aware of.

While Keli Sensing Technology (Ningbo)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.

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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.