There Are Reasons To Feel Uneasy About Anhui Transport Consulting & Design InstituteLtd's (SHSE:603357) Returns On Capital

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Anhui Transport Consulting & Design InstituteLtd (SHSE:603357) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. To calculate this metric for Anhui Transport Consulting & Design InstituteLtd, this is the formula:

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

0.14 = CN¥511m ÷ (CN¥6.5b - CN¥2.9b) (Based on the trailing twelve months to June 2024).

So, Anhui Transport Consulting & Design InstituteLtd has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 6.1% generated by the Professional Services industry.

Check out our latest analysis for Anhui Transport Consulting & Design InstituteLtd

Above you can see how the current ROCE for Anhui Transport Consulting & Design InstituteLtd 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 Anhui Transport Consulting & Design InstituteLtd for free.

What The Trend Of ROCE Can Tell Us

In terms of Anhui Transport Consulting & Design InstituteLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 14% from 20% 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.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 45%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 14%. 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.

The Bottom Line 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. These trends are starting to be recognized by investors since the stock has delivered a 11% gain to shareholders who've held 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.

One more thing, we've spotted 1 warning sign facing Anhui Transport Consulting & Design InstituteLtd that you might find interesting.

While Anhui Transport Consulting & Design 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.