Zhejiang JW Precision MachineryLtd's (SZSE:300984) Returns On Capital Not Reflecting Well On The Business

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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. In light of that, when we looked at Zhejiang JW Precision MachineryLtd (SZSE:300984) and its ROCE trend, we weren't exactly thrilled.

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. 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)

0.029 = CN¥30m ÷ (CN¥1.3b - CN¥298m) (Based on the trailing twelve months to March 2024).

Thus, Zhejiang JW Precision MachineryLtd has an ROCE of 2.9%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.6%.

View our latest analysis for Zhejiang JW Precision MachineryLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Zhejiang JW Precision MachineryLtd's past further, check out this free graph covering Zhejiang JW Precision MachineryLtd's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of Zhejiang JW Precision MachineryLtd's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 30%, but since then they've fallen to 2.9%. 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 may take some time before the company starts to see any change in earnings from these investments.

On a side note, Zhejiang JW Precision MachineryLtd has done well to pay down its current liabilities to 22% 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 On Zhejiang JW Precision MachineryLtd's ROCE

To conclude, we've found that Zhejiang JW Precision MachineryLtd is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 16% in the last year. 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 4 warning signs with Zhejiang JW Precision MachineryLtd (at least 3 which are a bit unpleasant) , and understanding them would certainly be useful.

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.