Here's What's Concerning About Winstech Precision Holding's (SZSE:001319) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Winstech Precision Holding (SZSE:001319) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

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 Winstech Precision Holding:

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

0.083 = CN¥107m ÷ (CN¥1.6b - CN¥346m) (Based on the trailing twelve months to September 2024).

So, Winstech Precision Holding has an ROCE of 8.3%. On its own, that's a low figure but it's around the 7.1% average generated by the Auto Components industry.

Check out our latest analysis for Winstech Precision Holding

Historical performance is a great place to start when researching a stock so above you can see the gauge for Winstech Precision Holding's ROCE against it's prior returns. If you'd like to look at how Winstech Precision Holding has performed in the past in other metrics, you can view this free graph of Winstech Precision Holding's past earnings, revenue and cash flow.

What Can We Tell From Winstech Precision Holding's ROCE Trend?

In terms of Winstech Precision Holding's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 20%, but since then they've fallen to 8.3%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Winstech Precision Holding has decreased its current liabilities to 21% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Winstech Precision Holding's ROCE

While returns have fallen for Winstech Precision Holding in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has followed suit returning a meaningful 86% to shareholders over the last year. So should these growth trends continue, we'd be optimistic on the stock going forward.

Winstech Precision Holding does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is significant...

While Winstech Precision Holding isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.