We Like Precision Tsugami (China)'s (HKG:1651) Returns And Here's How They're Trending

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. So when we looked at the ROCE trend of Precision Tsugami (China) (HKG:1651) we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Precision Tsugami (China) is:

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

0.41 = CN¥863m ÷ (CN¥3.4b - CN¥1.3b) (Based on the trailing twelve months to September 2021).

So, Precision Tsugami (China) has an ROCE of 41%. In absolute terms that's a great return and it's even better than the Machinery industry average of 9.9%.

View our latest analysis for Precision Tsugami (China)

In the above chart we have measured Precision Tsugami (China)'s prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Precision Tsugami (China).

How Are Returns Trending?

The trends we've noticed at Precision Tsugami (China) are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 41%. Basically the business is earning more per dollar of capital invested and in addition to that, 247% more capital is being employed now too. So we're very much inspired by what we're seeing at Precision Tsugami (China) thanks to its ability to profitably reinvest capital.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 38%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

The Bottom Line On Precision Tsugami (China)'s ROCE

In summary, it's great to see that Precision Tsugami (China) can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the total return from the stock has been almost flat over the last three years, there might be an opportunity here if the valuation looks good. With that in mind, we believe the promising trends warrant this stock for further investigation.

One more thing to note, we've identified 2 warning signs with Precision Tsugami (China) and understanding these should be part of your investment process.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.