Returns On Capital Signal Tricky Times Ahead For Jiangsu Pacific Precision Forging (SZSE:300258)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Jiangsu Pacific Precision Forging (SZSE:300258), it didn't seem to tick all of these boxes.

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. 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)

0.053 = 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%.

See 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, you can check out the forecasts from the analysts covering Jiangsu Pacific Precision Forging for free.

What The Trend Of ROCE Can Tell Us

In terms of Jiangsu Pacific Precision Forging's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 18% over the last five years. 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.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Jiangsu Pacific Precision Forging. And there could be an opportunity here if other metrics look good too, because the stock has declined 24% 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.

Like most companies, Jiangsu Pacific Precision Forging does come with some risks, and we've found 2 warning signs that you should be aware of.

While Jiangsu Pacific Precision Forging 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.