Shanghai Kelai Mechatronics EngineeringLtd (SHSE:603960) Will Want To Turn Around Its Return Trends

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. 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 Shanghai Kelai Mechatronics EngineeringLtd (SHSE:603960) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

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 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).

Thus, Shanghai Kelai Mechatronics EngineeringLtd has an ROCE of 7.3%. In absolute terms, that's a low return, but it's much better than the Machinery industry average of 5.2%.

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

When we looked at the ROCE trend at Shanghai Kelai Mechatronics EngineeringLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 7.3% from 19% 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 may take some time before the company starts to see any change in earnings from these investments.

On a side note, Shanghai Kelai Mechatronics EngineeringLtd has done well to pay down its current liabilities to 13% 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. 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 Key Takeaway

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. Unsurprisingly, the stock has only gained 19% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

Shanghai Kelai Mechatronics EngineeringLtd could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 603960 on our platform quite valuable.

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.