Returns On Capital Signal Tricky Times Ahead For Shanghai Kelai Mechatronics EngineeringLtd (SHSE:603960)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Although, when we looked at Shanghai Kelai Mechatronics EngineeringLtd (SHSE:603960), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Shanghai Kelai Mechatronics EngineeringLtd, this is the formula:

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

0.073 = CN¥80m ÷ (CN¥1.3b - CN¥168m) (Based on the trailing twelve months to September 2024).

So, Shanghai Kelai Mechatronics EngineeringLtd has an ROCE of 7.3%. On its own that's a low return, but compared to the average of 5.3% generated by the Machinery industry, it's much better.

View our latest analysis for Shanghai Kelai Mechatronics EngineeringLtd

Above you can see how the current ROCE for Shanghai Kelai Mechatronics EngineeringLtd 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 Kelai Mechatronics EngineeringLtd .

What Can We Tell From Shanghai Kelai Mechatronics EngineeringLtd's ROCE Trend?

When we looked at the ROCE trend at Shanghai Kelai Mechatronics EngineeringLtd, we didn't gain much confidence. To be more specific, ROCE has fallen from 19% 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Shanghai Kelai Mechatronics EngineeringLtd has decreased its current liabilities to 13% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Shanghai Kelai Mechatronics EngineeringLtd's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly then, the total return to shareholders over the last five years has been flat. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you're still interested in Shanghai Kelai Mechatronics EngineeringLtd it's worth checking out our FREE intrinsic value approximation for 603960 to see if it's trading at an attractive price in other respects.

While Shanghai Kelai Mechatronics EngineeringLtd 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.