The Returns On Capital At Kinco Automation (Shanghai)Ltd (SHSE:688160) Don't Inspire Confidence

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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 Kinco Automation (Shanghai)Ltd (SHSE:688160) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is 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. Analysts use this formula to calculate it for Kinco Automation (Shanghai)Ltd:

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

0.048 = CN¥38m ÷ (CN¥1.0b - CN¥247m) (Based on the trailing twelve months to September 2024).

Thus, Kinco Automation (Shanghai)Ltd has an ROCE of 4.8%. On its own, that's a low figure but it's around the 5.5% average generated by the Electronic industry.

See our latest analysis for Kinco Automation (Shanghai)Ltd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Kinco Automation (Shanghai)Ltd's past further, check out this free graph covering Kinco Automation (Shanghai)Ltd's past earnings, revenue and cash flow.

What Can We Tell From Kinco Automation (Shanghai)Ltd's ROCE Trend?

Unfortunately, the trend isn't great with ROCE falling from 20% five years ago, while capital employed has grown 229%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Kinco Automation (Shanghai)Ltd's earnings and if they change as a result from the capital raise.

The Bottom Line

To conclude, we've found that Kinco Automation (Shanghai)Ltd is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 93% over the last three years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

On a final note, we found 3 warning signs for Kinco Automation (Shanghai)Ltd (2 don't sit too well with us) you should be aware of.

While Kinco Automation (Shanghai)Ltd 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.