Precision Camshafts (NSE:PRECAM) Will Want To Turn Around Its Return Trends

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after briefly looking over the numbers, we don't think Precision Camshafts (NSE:PRECAM) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

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. To calculate this metric for Precision Camshafts, this is the formula:

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

0.029 = ₹219m ÷ (₹11b - ₹3.1b) (Based on the trailing twelve months to March 2022).

So, Precision Camshafts has an ROCE of 2.9%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 11%.

View our latest analysis for Precision Camshafts

Historical performance is a great place to start when researching a stock so above you can see the gauge for Precision Camshafts' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Precision Camshafts, check out these free graphs here.

So How Is Precision Camshafts' ROCE Trending?

When we looked at the ROCE trend at Precision Camshafts, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 2.9% from 11% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On Precision Camshafts' ROCE

While returns have fallen for Precision Camshafts in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These trends don't appear to have influenced returns though, because the total return from the stock has been mostly flat over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Precision Camshafts (of which 1 can't be ignored!) that you should know about.

While Precision Camshafts 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. 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.