If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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 Impro Precision Industries (HKG:1286) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Impro Precision Industries is:

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

0.11 = HK$711m ÷ (HK$8.1b - HK$1.8b) (Based on the trailing twelve months to June 2024).

Therefore, Impro Precision Industries has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 9.1% it's much better.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Impro Precision Industries' ROCE against it's prior returns. If you're interested in investigating Impro Precision Industries' past further, check out this free graph covering Impro Precision Industries' past earnings, revenue and cash flow.

How Are Returns Trending?

When we looked at the ROCE trend at Impro Precision Industries, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 11% from 16% five years ago. However it looks like Impro Precision Industries 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.

The Bottom Line On Impro Precision Industries' ROCE

In summary, Impro Precision Industries is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 21% in the last five years. Therefore based on the analysis done in this article, we don't think Impro Precision Industries has the makings of a multi-bagger.

If you want to continue researching Impro Precision Industries, you might be interested to know about the 1 warning sign that our analysis has discovered.

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.