Precision Metaliks (NSE:PRECISION) Hasn't Managed To Accelerate Its Returns

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Precision Metaliks (NSE:PRECISION) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

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

0.077 = ₹68m ÷ (₹1.6b - ₹765m) (Based on the trailing twelve months to September 2024).

So, Precision Metaliks has an ROCE of 7.7%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 14%.

See our latest analysis for Precision Metaliks

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Precision Metaliks' past further, check out this free graph covering Precision Metaliks' past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of Precision Metaliks' historical ROCE trend, it doesn't exactly demand attention. The company has employed 1,490% more capital in the last five years, and the returns on that capital have remained stable at 7.7%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 47% of total assets, this reported ROCE would probably be less than7.7% because total capital employed would be higher.The 7.7% ROCE could be even lower if current liabilities weren't 47% of total assets, because the the formula would show a larger base of total capital employed. Additionally, this high level of current liabilities isn't ideal because it means the company's suppliers (or short-term creditors) are effectively funding a large portion of the business.

The Bottom Line On Precision Metaliks' ROCE

Long story short, while Precision Metaliks has been reinvesting its capital, the returns that it's generating haven't increased. Additionally, the stock's total return to shareholders over the last three years has been flat, which isn't too surprising. 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 final note, you should learn about the 4 warning signs we've spotted with Precision Metaliks (including 3 which make us uncomfortable) .

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.