Capital Allocation Trends At World Precision Machinery (SGX:B49) Aren't Ideal

What financial metrics can indicate to us that a company is maturing or even in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. In light of that, from a first glance at World Precision Machinery (SGX:B49), we've spotted some signs that it could be struggling, so let's investigate.

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

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

0.019 = CN¥21m ÷ (CN¥1.7b - CN¥599m) (Based on the trailing twelve months to December 2020).

So, World Precision Machinery has an ROCE of 1.9%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.5%.

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. To be more specific, the ROCE was 3.8% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect World Precision Machinery to turn into a multi-bagger.

The Bottom Line

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. It should come as no surprise then that the stock has fallen 14% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a final note, we found 4 warning signs for World Precision Machinery (1 makes us a bit uncomfortable) you should be aware of.

While World Precision Machinery may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. 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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