Here's What's Concerning About Kinco Automation (Shanghai)Ltd's (SHSE:688160) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Kinco Automation (Shanghai)Ltd (SHSE:688160) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Kinco Automation (Shanghai)Ltd is:

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

0.061 = CN¥48m ÷ (CN¥930m - CN¥144m) (Based on the trailing twelve months to March 2024).

Thus, Kinco Automation (Shanghai)Ltd has an ROCE of 6.1%. In absolute terms, that's a low return but it's around the Electronic industry average of 5.2%.

Check out our latest analysis for Kinco Automation (Shanghai)Ltd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Kinco Automation (Shanghai)Ltd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Kinco Automation (Shanghai)Ltd.

What Does the ROCE Trend For Kinco Automation (Shanghai)Ltd Tell Us?

The trend of ROCE doesn't look fantastic because it's fallen from 20% five years ago, while the business's capital employed increased by 253%. Usually this isn't ideal, but given Kinco Automation (Shanghai)Ltd conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Kinco Automation (Shanghai)Ltd might not have received a full period of earnings contribution from it.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Kinco Automation (Shanghai)Ltd's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 19% over the last three years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Kinco Automation (Shanghai)Ltd has the makings of a multi-bagger.

Like most companies, Kinco Automation (Shanghai)Ltd does come with some risks, and we've found 3 warning signs that you should be aware of.

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.