Jiangsu Pacific Precision Forging (SZSE:300258) Will Be Hoping To Turn Its Returns On Capital Around

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Jiangsu Pacific Precision Forging (SZSE:300258) 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?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)

0.05 = CN¥258m ÷ (CN¥6.4b - CN¥1.2b) (Based on the trailing twelve months to March 2024).

Therefore, Jiangsu Pacific Precision Forging has an ROCE of 5.0%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 6.9%.

Check out our latest analysis for Jiangsu Pacific Precision Forging

In the above chart we have measured Jiangsu Pacific Precision Forging's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Jiangsu Pacific Precision Forging for free.

What Can We Tell From Jiangsu Pacific Precision Forging's ROCE Trend?

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 5.0% from 15% 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From Jiangsu Pacific Precision Forging's ROCE

While returns have fallen for Jiangsu Pacific Precision Forging in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 31% in the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

On a separate note, we've found 1 warning sign for Jiangsu Pacific Precision Forging you'll probably want to know about.

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.

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