In This Article:
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at World Precision Machinery (SGX:B49) and its trend of ROCE, we really liked what we saw.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)
0.015 = CN¥18m ÷ (CN¥2.2b - CN¥979m) (Based on the trailing twelve months to September 2023).
Thus, World Precision Machinery has an ROCE of 1.5%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 6.8%.
Check out 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're interested in investigating World Precision Machinery's past further, check out this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The figures show that over the last five years, ROCE has grown 138% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 45% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.
The Bottom Line
As discussed above, World Precision Machinery appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Since the stock has returned a staggering 172% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if World Precision Machinery can keep these trends up, it could have a bright future ahead.