If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. However, after briefly looking over the numbers, we don't think Academy of Environmental Planning and DesignLtd. Nanjing University (SZSE:300864) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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 Academy of Environmental Planning and DesignLtd. Nanjing University:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.08 = CN¥101m ÷ (CN¥1.5b - CN¥268m) (Based on the trailing twelve months to March 2023).
So, Academy of Environmental Planning and DesignLtd. Nanjing University has an ROCE of 8.0%. In absolute terms, that's a low return, but it's much better than the Commercial Services industry average of 5.8%.
Check out our latest analysis for Academy of Environmental Planning and DesignLtd. Nanjing University
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Academy of Environmental Planning and DesignLtd. Nanjing University, check out these free graphs here.
So How Is Academy of Environmental Planning and DesignLtd. Nanjing University's ROCE Trending?
In terms of Academy of Environmental Planning and DesignLtd. Nanjing University's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 8.0% from 53% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
On a side note, Academy of Environmental Planning and DesignLtd. Nanjing University has done well to pay down its current liabilities to 18% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
Our Take On Academy of Environmental Planning and DesignLtd. Nanjing University's ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Academy of Environmental Planning and DesignLtd. Nanjing University. And the stock has followed suit returning a meaningful 17% to shareholders over the last year. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.
One more thing to note, we've identified 2 warning signs with Academy of Environmental Planning and DesignLtd. Nanjing University and understanding them should be part of your investment process.
While Academy of Environmental Planning and DesignLtd. Nanjing University 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. 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.