Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Although, when we looked at TianJin JinRong TianYu Precision Machinery (SZSE:300988), it didn't seem to tick all of these boxes.
Understanding 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 TianJin JinRong TianYu Precision Machinery:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.072 = CN¥91m ÷ (CN¥1.9b - CN¥690m) (Based on the trailing twelve months to September 2023).
Therefore, TianJin JinRong TianYu Precision Machinery has an ROCE of 7.2%. In absolute terms, that's a low return, but it's much better than the Auto Components industry average of 5.8%.
Check out our latest analysis for TianJin JinRong TianYu Precision Machinery
Historical performance is a great place to start when researching a stock so above you can see the gauge for TianJin JinRong TianYu Precision Machinery's ROCE against it's prior returns. If you'd like to look at how TianJin JinRong TianYu Precision Machinery has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
So How Is TianJin JinRong TianYu Precision Machinery's ROCE Trending?
We weren't thrilled with the trend because TianJin JinRong TianYu Precision Machinery's ROCE has reduced by 47% over the last five years, while the business employed 218% more capital. That being said, TianJin JinRong TianYu Precision Machinery raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with TianJin JinRong TianYu Precision Machinery's earnings and if they change as a result from the capital raise.
What We Can Learn From TianJin JinRong TianYu Precision Machinery's ROCE
To conclude, we've found that TianJin JinRong TianYu Precision Machinery is reinvesting in the business, but returns have been falling. Since the stock has declined 32% over the last year, investors may not be too optimistic on this trend improving either. 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.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for TianJin JinRong TianYu Precision Machinery (of which 1 is a bit concerning!) that you should know about.
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.