Returns On Capital Signal Tricky Times Ahead For Anhui Provincial Architectural Design and Research InstituteLtd (SZSE:301167)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Anhui Provincial Architectural Design and Research InstituteLtd (SZSE:301167) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Anhui Provincial Architectural Design and Research InstituteLtd, this is the formula:

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

0.038 = CN¥38m ÷ (CN¥1.3b - CN¥351m) (Based on the trailing twelve months to March 2024).

Thus, Anhui Provincial Architectural Design and Research InstituteLtd has an ROCE of 3.8%. In absolute terms, that's a low return and it also under-performs the Professional Services industry average of 5.7%.

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

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 Anhui Provincial Architectural Design and Research InstituteLtd's past further, check out this free graph covering Anhui Provincial Architectural Design and Research InstituteLtd's past earnings, revenue and cash flow.

The Trend Of ROCE

When we looked at the ROCE trend at Anhui Provincial Architectural Design and Research InstituteLtd, we didn't gain much confidence. Around five years ago the returns on capital were 22%, but since then they've fallen to 3.8%. However it looks like Anhui Provincial Architectural Design and Research InstituteLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Anhui Provincial Architectural Design and Research InstituteLtd has decreased its current liabilities to 26% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Anhui Provincial Architectural Design and Research InstituteLtd's ROCE

To conclude, we've found that Anhui Provincial Architectural Design and Research InstituteLtd is reinvesting in the business, but returns have been falling. Since the stock has declined 29% over the last year, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Anhui Provincial Architectural Design and Research InstituteLtd has the makings of a multi-bagger.

If you want to know some of the risks facing Anhui Provincial Architectural Design and Research InstituteLtd we've found 3 warning signs (1 is a bit concerning!) that you should be aware of before investing here.

While Anhui Provincial Architectural Design and Research InstituteLtd 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.