Anhui Provincial Architectural Design and Research InstituteLtd (SZSE:301167) May Have Issues Allocating Its Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. However, after investigating Anhui Provincial Architectural Design and Research InstituteLtd (SZSE:301167), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

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. 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).

Therefore, Anhui Provincial Architectural Design and Research InstituteLtd has an ROCE of 5.5%. On its own, that's a low figure but it's around the 5.6% average generated by the Professional Services industry.

Check out our latest analysis for Anhui Provincial Architectural Design and Research InstituteLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Anhui Provincial Architectural Design and Research InstituteLtd's ROCE against it's prior returns. If you'd like to look at how Anhui Provincial Architectural Design and Research InstituteLtd has performed in the past in other metrics, you can view this free graph of Anhui Provincial Architectural Design and Research InstituteLtd's past earnings, revenue and cash flow.

What Does the ROCE Trend For Anhui Provincial Architectural Design and Research InstituteLtd Tell Us?

On the surface, the trend of ROCE at Anhui Provincial Architectural Design and Research InstituteLtd doesn't inspire 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

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. So we could link some of this to the decrease in ROCE. 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.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Anhui Provincial Architectural Design and Research InstituteLtd 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 27% over the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One final note, you should learn about the 4 warning signs we've spotted with Anhui Provincial Architectural Design and Research InstituteLtd (including 1 which is a bit concerning) .

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.