What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. However, after investigating Jiangsu Pacific Precision Forging (SZSE:300258), we don't think it's current trends fit the mold of a multi-bagger.

What Is 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. Analysts use this formula to calculate it for Jiangsu Pacific Precision Forging:

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

0.04 = CN¥208m ÷ (CN¥6.7b - CN¥1.5b) (Based on the trailing twelve months to September 2024).

Therefore, Jiangsu Pacific Precision Forging has an ROCE of 4.0%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 6.9%.

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 analyst report for Jiangsu Pacific Precision Forging .

So How Is Jiangsu Pacific Precision Forging's ROCE Trending?

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 4.0% from 12% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On Jiangsu Pacific Precision Forging's ROCE

To conclude, we've found that Jiangsu Pacific Precision Forging is reinvesting in the business, but returns have been falling. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

On a final note, we've found 2 warning signs for Jiangsu Pacific Precision Forging that we think you should be aware of.

While Jiangsu Pacific Precision Forging 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.