If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Jiangsu Pacific Precision Forging (SZSE:300258) and its ROCE trend, we weren't exactly thrilled.
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 Jiangsu Pacific Precision Forging, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.053 = CN¥263m ÷ (CN¥6.5b - CN¥1.6b) (Based on the trailing twelve months to September 2023).
So, Jiangsu Pacific Precision Forging has an ROCE of 5.3%. In absolute terms, that's a low return but it's around the Auto Components industry average of 5.8%.
View our latest analysis for Jiangsu Pacific Precision Forging
Above you can see how the current ROCE for Jiangsu Pacific Precision Forging 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 report for Jiangsu Pacific Precision Forging.
What The Trend Of ROCE Can Tell Us
When we looked at the ROCE trend at Jiangsu Pacific Precision Forging, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 5.3% from 18% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
The Bottom Line
In summary, despite lower returns in the short term, we're encouraged to see that Jiangsu Pacific Precision Forging is reinvesting for growth and has higher sales as a result. These trends are starting to be recognized by investors since the stock has delivered a 6.3% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.
Jiangsu Pacific Precision Forging does have some risks though, and we've spotted 3 warning signs for Jiangsu Pacific Precision Forging that you might be interested in.
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.
