What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Astro-century Education&TechnologyLtd (SZSE:300654) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Astro-century Education&TechnologyLtd is:

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

0.054 = CN¥45m ÷ (CN¥1.1b - CN¥268m) (Based on the trailing twelve months to September 2023).

So, Astro-century Education&TechnologyLtd has an ROCE of 5.4%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.9%.

See our latest analysis for Astro-century Education&TechnologyLtd

Above you can see how the current ROCE for Astro-century Education&TechnologyLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Astro-century Education&TechnologyLtd here for free.

What Can We Tell From Astro-century Education&TechnologyLtd's ROCE Trend?

When we looked at the ROCE trend at Astro-century Education&TechnologyLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 5.4% from 9.5% 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Key Takeaway

While returns have fallen for Astro-century Education&TechnologyLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has done incredibly well with a 104% return over the last five years, so long term investors are no doubt ecstatic with that result. 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.

Like most companies, Astro-century Education&TechnologyLtd does come with some risks, and we've found 1 warning sign that you should be aware of.

While Astro-century Education&TechnologyLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.