Tjk Machinery (Tianjin) (SZSE:300823) Is Reinvesting At Lower Rates Of Return

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. 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 Tjk Machinery (Tianjin) (SZSE:300823) 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?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Tjk Machinery (Tianjin):

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

0.04 = CN¥40m ÷ (CN¥1.3b - CN¥274m) (Based on the trailing twelve months to September 2023).

So, Tjk Machinery (Tianjin) has an ROCE of 4.0%. Ultimately, that's a low return and it under-performs the Machinery industry average of 6.1%.

View our latest analysis for Tjk Machinery (Tianjin)

Historical performance is a great place to start when researching a stock so above you can see the gauge for Tjk Machinery (Tianjin)'s ROCE against it's prior returns. If you'd like to look at how Tjk Machinery (Tianjin) has performed in the past in other metrics, you can view this free graph of Tjk Machinery (Tianjin)'s past earnings, revenue and cash flow.

What Can We Tell From Tjk Machinery (Tianjin)'s ROCE Trend?

On the surface, the trend of ROCE at Tjk Machinery (Tianjin) doesn't inspire confidence. Over the last five years, returns on capital have decreased to 4.0% from 21% five years ago. However it looks like Tjk Machinery (Tianjin) 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 may take some time before the company starts to see any change in earnings from these investments.

On a side note, Tjk Machinery (Tianjin) has done well to pay down its current liabilities to 22% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Tjk Machinery (Tianjin)'s ROCE

Bringing it all together, while we're somewhat encouraged by Tjk Machinery (Tianjin)'s 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 33% in the last three years. 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.

Tjk Machinery (Tianjin) does have some risks, we noticed 3 warning signs (and 2 which shouldn't be ignored) we think you should know about.

While Tjk Machinery (Tianjin) 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.