To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Anhui Provincial Architectural Design and Research InstituteLtd (SZSE:301167) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What Is It?
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 Anhui Provincial Architectural Design and Research InstituteLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.055 = CN¥54m ÷ (CN¥1.3b - CN¥358m) (Based on the trailing twelve months to September 2023).
So, Anhui Provincial Architectural Design and Research InstituteLtd has an ROCE of 5.5%. In absolute terms, that's a low return but it's around the Professional Services industry average of 5.5%.
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 Anhui Provincial Architectural Design and Research InstituteLtd, check out these free graphs here.
So How Is Anhui Provincial Architectural Design and Research InstituteLtd's ROCE Trending?
When we looked at the ROCE trend at Anhui Provincial Architectural Design and Research InstituteLtd, we didn't gain much confidence. Around five years ago the returns on capital were 22%, but since then they've fallen to 5.5%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
On a side note, Anhui Provincial Architectural Design and Research InstituteLtd has done well to pay down its current liabilities to 27% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.
The Bottom Line
While returns have fallen for Anhui Provincial Architectural Design and Research InstituteLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, despite the promising trends, the stock has fallen 29% over the last year, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.
On a final note, we found 3 warning signs for Anhui Provincial Architectural Design and Research InstituteLtd (1 shouldn't be ignored) you should be aware of.
While Anhui Provincial Architectural Design and Research InstituteLtd 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.