OKE Precision Cutting Tools' (SHSE:688308) Returns On Capital Not Reflecting Well On The Business

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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. However, after briefly looking over the numbers, we don't think OKE Precision Cutting Tools (SHSE:688308) 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 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. To calculate this metric for OKE Precision Cutting Tools, this is the formula:

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

0.035 = CN¥95m ÷ (CN¥4.0b - CN¥1.3b) (Based on the trailing twelve months to March 2024).

Thus, OKE Precision Cutting Tools has an ROCE of 3.5%. Ultimately, that's a low return and it under-performs the Machinery industry average of 5.6%.

Check out our latest analysis for OKE Precision Cutting Tools

Above you can see how the current ROCE for OKE Precision Cutting Tools compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for OKE Precision Cutting Tools .

What Can We Tell From OKE Precision Cutting Tools' ROCE Trend?

On the surface, the trend of ROCE at OKE Precision Cutting Tools doesn't inspire confidence. Over the last five years, returns on capital have decreased to 3.5% from 11% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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.

The Bottom Line On OKE Precision Cutting Tools' ROCE

Bringing it all together, while we're somewhat encouraged by OKE Precision Cutting Tools' reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 59% in the last three years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

OKE Precision Cutting Tools does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those is significant...

While OKE Precision Cutting Tools 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com