Capital Allocation Trends At SKSHU PaintLtd (SHSE:603737) Aren't Ideal

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. However, after briefly looking over the numbers, we don't think SKSHU PaintLtd (SHSE:603737) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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 SKSHU PaintLtd, this is the formula:

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

0.002 = CN¥9.8m ÷ (CN¥15b - CN¥11b) (Based on the trailing twelve months to September 2024).

Thus, SKSHU PaintLtd has an ROCE of 0.2%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 5.4%.

See our latest analysis for SKSHU PaintLtd

Above you can see how the current ROCE for SKSHU PaintLtd 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 SKSHU PaintLtd .

The Trend Of ROCE

On the surface, the trend of ROCE at SKSHU PaintLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 22% over the last five years. However it looks like SKSHU PaintLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.

Another thing to note, SKSHU PaintLtd has a high ratio of current liabilities to total assets of 69%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On SKSHU PaintLtd's ROCE

To conclude, we've found that SKSHU PaintLtd is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 61% over the last five 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.

One final note, you should learn about the 3 warning signs we've spotted with SKSHU PaintLtd (including 1 which is significant) .

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.