Can World Precision Machinery (SGX:B49) Turn Things Around?

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. And from a first read, things don't look too good at World Precision Machinery (SGX:B49), so let's see why.

What is 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. Analysts use this formula to calculate it for World Precision Machinery:

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

0.027 = CN¥29m ÷ (CN¥1.8b - CN¥682m) (Based on the trailing twelve months to September 2020).

So, World Precision Machinery has an ROCE of 2.7%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 6.3%.

See our latest analysis for World Precision Machinery

Historical performance is a great place to start when researching a stock so above you can see the gauge for World Precision Machinery's ROCE against it's prior returns. If you'd like to look at how World Precision Machinery has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From World Precision Machinery's ROCE Trend?

In terms of World Precision Machinery's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 7.5%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect World Precision Machinery to turn into a multi-bagger.

On a side note, World Precision Machinery's current liabilities have increased over the last five years to 38% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 2.7%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

In Conclusion...

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. In spite of that, the stock has delivered a 1.6% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

One more thing: We've identified 4 warning signs with World Precision Machinery (at least 2 which are potentially serious) , and understanding them would certainly be useful.

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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