Bozhon Precision Industry TechnologyLtd (SHSE:688097) Will Be Hoping To Turn Its Returns On Capital Around

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Bozhon Precision Industry TechnologyLtd (SHSE:688097) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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 Bozhon Precision Industry TechnologyLtd, this is the formula:

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

0.053 = CN¥235m ÷ (CN¥8.1b - CN¥3.6b) (Based on the trailing twelve months to March 2024).

Therefore, Bozhon Precision Industry TechnologyLtd has an ROCE of 5.3%. On its own, that's a low figure but it's around the 5.6% average generated by the Machinery industry.

View our latest analysis for Bozhon Precision Industry TechnologyLtd

Above you can see how the current ROCE for Bozhon Precision Industry TechnologyLtd 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 Bozhon Precision Industry TechnologyLtd .

What Can We Tell From Bozhon Precision Industry TechnologyLtd's ROCE Trend?

When we looked at the ROCE trend at Bozhon Precision Industry TechnologyLtd, we didn't gain much confidence. Around five years ago the returns on capital were 26%, but since then they've fallen to 5.3%. However it looks like Bozhon Precision Industry TechnologyLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Bozhon Precision Industry TechnologyLtd has done well to pay down its current liabilities to 45% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Keep in mind 45% is still pretty high, so those risks are still somewhat prevalent.

The Key Takeaway

In summary, Bozhon Precision Industry TechnologyLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 60% over the last three years, investors may not be too optimistic on this trend improving either. 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.

One more thing: We've identified 2 warning signs with Bozhon Precision Industry TechnologyLtd (at least 1 which doesn't sit too well with us) , and understanding these would certainly be useful.

While Bozhon Precision Industry TechnologyLtd 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.