Shanghai Kelai Mechatronics EngineeringLtd (SHSE:603960) May Have Issues Allocating Its Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Shanghai Kelai Mechatronics EngineeringLtd (SHSE:603960) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for Shanghai Kelai Mechatronics EngineeringLtd:

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

0.082 = CN¥90m ÷ (CN¥1.3b - CN¥153m) (Based on the trailing twelve months to March 2024).

Therefore, Shanghai Kelai Mechatronics EngineeringLtd has an ROCE of 8.2%. In absolute terms, that's a low return, but it's much better than the Machinery industry average of 5.6%.

See our latest analysis for Shanghai Kelai Mechatronics EngineeringLtd

In the above chart we have measured Shanghai Kelai Mechatronics EngineeringLtd's prior ROCE against its prior performance, but the future is arguably more important. 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 .

The Trend Of ROCE

In terms of Shanghai Kelai Mechatronics EngineeringLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 8.2% from 16% five years ago. 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 side note, Shanghai Kelai Mechatronics EngineeringLtd has done well to pay down its current liabilities to 12% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Shanghai Kelai Mechatronics EngineeringLtd's ROCE

In summary, Shanghai Kelai Mechatronics EngineeringLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger 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.

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.