There Are Reasons To Feel Uneasy About Precision Camshafts' (NSE:PRECAM) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Precision Camshafts (NSE:PRECAM) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Precision Camshafts is:

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

0.0028 = ₹21m ÷ (₹10b - ₹2.6b) (Based on the trailing twelve months to June 2021).

So, Precision Camshafts has an ROCE of 0.3%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 14%.

Check out 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're interested in investigating Precision Camshafts' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Precision Camshafts Tell Us?

When we looked at the ROCE trend at Precision Camshafts, we didn't gain much confidence. Around five years ago the returns on capital were 13%, but since then they've fallen to 0.3%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line On Precision Camshafts' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Precision Camshafts is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 39% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Precision Camshafts does have some risks, we noticed 5 warning signs (and 1 which is a bit unpleasant) we think you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.
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