Precision Camshafts (NSE: PRECAM) returns on capital do not reflect well on the business

If you are looking for a multi-bagger, there are a few things to look out for. A common approach is to try to find a business with Return on capital employed (ROCE) which increases, in connection with growth quantity capital employed. Simply put, these types of businesses are dialing machines, which means they continually reinvest their profits at ever higher rates of return. Although, when we considered Precision camshafts (NSE: PRECAM), it didn’t seem to tick all of those boxes.

Understanding Return on Capital Employed (ROCE)

Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. Analysts use this formula to calculate it for precision camshafts:

Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)

0.018 = 136m ÷ (₹ 10b – ₹ 2.7b) (Based on the last twelve months up to September 2021).

So, Precision Camshafts has a ROCE of 1.8%. Ultimately, that’s low efficiency, and it’s lower than the auto components industry average of 13%.

See our latest review for precision camshafts

Although the past is not representative of the future, it can be useful to know the historical performance of a company, which is why we have this graph above. If you want to learn more about the history of precision camshafts, check out this free graph of past income, income and cash flow.

What can we say about the ROCE trend for precision camshafts?

On the surface, the ROCE trend at Precision Camshafts does not inspire confidence. About five years ago, returns on capital were 12%, but since then they have fallen to 1.8%. However, as both capital employed and income have increased, it appears that the company is currently continuing to grow, resulting in short-term returns. If these investments prove to be successful, it can bode very well for stock performance in the long run.

What we can learn from the ROCE of precision camshafts

Although returns on capital have declined in the short term, we find promise that both income and capital employed have increased for Precision Camshafts. These trends do not appear to have influenced returns, however, as the stock’s total return has been mostly stable over the past five years. Accordingly, we recommend that you dig deeper into this stock to find out what other business fundamentals can show us.

Precision camshafts carry certain risks, we have noticed 4 warning signs (and 1 which is of concern) we think you should be aware of.

If you want to look for solid businesses with great income, check out this free list of companies with good balance sheets and impressive returns on equity.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.