Returns On Capital At Impro Precision Industries (HKG:1286) Paint An Interesting Picture

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Impro Precision Industries (HKG:1286) 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)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Impro Precision Industries is:

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

0.13 = HK$518m ÷ (HK$5.2b - HK$1.0b) (Based on the trailing twelve months to June 2020).

So, Impro Precision Industries has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 8.8% generated by the Machinery industry.

Check out our latest analysis for Impro Precision Industries

In the above chart we have measured Impro Precision Industries' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Impro Precision Industries here for free.

What The Trend Of ROCE Can Tell Us

There hasn't been much to report for Impro Precision Industries' returns and its level of capital employed because both metrics have been steady for the past three years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So unless we see a substantial change at Impro Precision Industries in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

Our Take On Impro Precision Industries' ROCE

In summary, Impro Precision Industries isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Since the stock has declined 17% over the last year, 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 to note, we've identified 1 warning sign with Impro Precision Industries and understanding this should be part of your investment process.

While Impro Precision Industries 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. 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.
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