Here's What To Make Of Arcplus Group's (SHSE:600629) Decelerating Rates Of Return

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Arcplus Group (SHSE:600629), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Arcplus Group, this is the formula:

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

0.10 = CN¥633m ÷ (CN¥16b - CN¥9.5b) (Based on the trailing twelve months to December 2023).

Thus, Arcplus Group has an ROCE of 10.0%. On its own that's a low return, but compared to the average of 5.9% generated by the Professional Services industry, it's much better.

See our latest analysis for Arcplus Group

Above you can see how the current ROCE for Arcplus Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Arcplus Group .

What Can We Tell From Arcplus Group's ROCE Trend?

There are better returns on capital out there than what we're seeing at Arcplus Group. The company has employed 100% more capital in the last five years, and the returns on that capital have remained stable at 10.0%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

On a separate but related note, it's important to know that Arcplus Group has a current liabilities to total assets ratio of 60%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

In conclusion, Arcplus Group has been investing more capital into the business, but returns on that capital haven't increased. And investors appear hesitant that the trends will pick up because the stock has fallen 34% in the last five years. Therefore based on the analysis done in this article, we don't think Arcplus Group has the makings of a multi-bagger.

One more thing to note, we've identified 1 warning sign with Arcplus Group and understanding this should be part of your investment process.

While Arcplus Group 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.