The Trends At Precision Tsugami (China) (HKG:1651) That You Should Know About

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Precision Tsugami (China) (HKG:1651) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for Precision Tsugami (China):

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

0.18 = CN¥284m ÷ (CN¥2.2b - CN¥581m) (Based on the trailing twelve months to September 2020).

So, Precision Tsugami (China) has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 9.4% it's much better.

Check out our latest analysis for Precision Tsugami (China)

Above you can see how the current ROCE for Precision Tsugami (China) compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Precision Tsugami (China).

The Trend Of ROCE

In terms of Precision Tsugami (China)'s historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 33%, but since then they've fallen to 18%. However it looks like Precision Tsugami (China) 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, Precision Tsugami (China) has done well to pay down its current liabilities to 27% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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.

In Conclusion...

To conclude, we've found that Precision Tsugami (China) is reinvesting in the business, but returns have been falling. And investors may be recognizing these trends since the stock has only returned a total of 8.0% to shareholders over the last three years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

Precision Tsugami (China) does have some risks though, and we've spotted 1 warning sign for Precision Tsugami (China) that you might be interested in.

While Precision Tsugami (China) 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. 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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