Wuxi Best Precision Machinery's (SZSE:300580) Returns Have Hit A Wall

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. Although, when we looked at Wuxi Best Precision Machinery (SZSE:300580), 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. To calculate this metric for Wuxi Best Precision Machinery, this is the formula:

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

0.094 = CN¥300m ÷ (CN¥3.6b - CN¥413m) (Based on the trailing twelve months to March 2024).

So, Wuxi Best Precision Machinery has an ROCE of 9.4%. On its own that's a low return, but compared to the average of 6.9% generated by the Auto Components industry, it's much better.

Check out our latest analysis for Wuxi Best Precision Machinery

In the above chart we have measured Wuxi Best Precision Machinery's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Wuxi Best Precision Machinery .

How Are Returns Trending?

In terms of Wuxi Best Precision Machinery's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 9.4% for the last five years, and the capital employed within the business has risen 119% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

What We Can Learn From Wuxi Best Precision Machinery's ROCE

Long story short, while Wuxi Best Precision Machinery has been reinvesting its capital, the returns that it's generating haven't increased. Yet to long term shareholders the stock has gifted them an incredible 106% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you want to continue researching Wuxi Best Precision Machinery, you might be interested to know about the 2 warning signs that our analysis has discovered.

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.

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