Anhui Transport Consulting & Design InstituteLtd (SHSE:603357) Will Want To Turn Around Its Return Trends

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Although, when we looked at Anhui Transport Consulting & Design InstituteLtd (SHSE:603357), it didn't seem to tick all of these boxes.

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. Analysts use this formula to calculate it for Anhui Transport Consulting & Design InstituteLtd:

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

0.15 = CN¥543m ÷ (CN¥6.1b - CN¥2.5b) (Based on the trailing twelve months to March 2024).

So, Anhui Transport Consulting & Design InstituteLtd has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 5.7% generated by the Professional Services industry.

See our latest analysis for Anhui Transport Consulting & Design InstituteLtd

In the above chart we have measured Anhui Transport Consulting & Design InstituteLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Anhui Transport Consulting & Design InstituteLtd for free.

So How Is Anhui Transport Consulting & Design InstituteLtd's ROCE Trending?

On the surface, the trend of ROCE at Anhui Transport Consulting & Design InstituteLtd doesn't inspire confidence. Around five years ago the returns on capital were 21%, but since then they've fallen to 15%. 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.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 40%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 15%. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

Our Take On Anhui Transport Consulting & Design InstituteLtd's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Anhui Transport Consulting & Design InstituteLtd is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 6.3% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

Anhui Transport Consulting & Design InstituteLtd does have some risks though, and we've spotted 1 warning sign for Anhui Transport Consulting & Design InstituteLtd that you might be interested in.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.