Zhejiang JW Precision MachineryLtd (SZSE:300984) Will Want To Turn Around Its Return Trends

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Zhejiang JW Precision MachineryLtd (SZSE:300984) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

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 Zhejiang JW Precision MachineryLtd:

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

0.032 = CN¥33m ÷ (CN¥1.4b - CN¥333m) (Based on the trailing twelve months to September 2024).

So, Zhejiang JW Precision MachineryLtd has an ROCE of 3.2%. Ultimately, that's a low return and it under-performs the Machinery industry average of 5.3%.

Check out our latest analysis for Zhejiang JW Precision MachineryLtd

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

How Are Returns Trending?

When we looked at the ROCE trend at Zhejiang JW Precision MachineryLtd, we didn't gain much confidence. Around five years ago the returns on capital were 28%, but since then they've fallen to 3.2%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Zhejiang JW Precision MachineryLtd has decreased its current liabilities to 24% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that Zhejiang JW Precision MachineryLtd is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 54% to shareholders over the last three years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 5 warning signs for Zhejiang JW Precision MachineryLtd (of which 3 are a bit unpleasant!) that you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.