Academy of Environmental Planning and DesignLtd. Nanjing University (SZSE:300864) Could Be Struggling To Allocate Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Academy of Environmental Planning and DesignLtd. Nanjing University (SZSE:300864) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

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 Academy of Environmental Planning and DesignLtd. Nanjing University:

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

0.099 = CN¥125m ÷ (CN¥1.7b - CN¥392m) (Based on the trailing twelve months to June 2024).

Therefore, Academy of Environmental Planning and DesignLtd. Nanjing University has an ROCE of 9.9%. In absolute terms, that's a low return, but it's much better than the Commercial Services industry average of 5.6%.

Check out our latest analysis for Academy of Environmental Planning and DesignLtd. Nanjing University

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're interested in investigating Academy of Environmental Planning and DesignLtd. Nanjing University's past further, check out this free graph covering Academy of Environmental Planning and DesignLtd. Nanjing University's past earnings, revenue and cash flow.

So How Is Academy of Environmental Planning and DesignLtd. Nanjing University's ROCE Trending?

In terms of Academy of Environmental Planning and DesignLtd. Nanjing University's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 52% over the last five years. 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. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Academy of Environmental Planning and DesignLtd. Nanjing University has decreased its current liabilities to 24% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Academy of Environmental Planning and DesignLtd. Nanjing University's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Academy of Environmental Planning and DesignLtd. Nanjing University is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 18% over the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Like most companies, Academy of Environmental Planning and DesignLtd. Nanjing University does come with some risks, and we've found 2 warning signs that you should be aware of.

While Academy of Environmental Planning and DesignLtd. Nanjing University 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.