Investors Could Be Concerned With AVE Science&TechnologyLTD's (SHSE:688067) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. In light of that, when we looked at AVE Science&TechnologyLTD (SHSE:688067) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on AVE Science&TechnologyLTD is:

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

0.046 = CN¥23m ÷ (CN¥544m - CN¥56m) (Based on the trailing twelve months to December 2023).

Thus, AVE Science&TechnologyLTD has an ROCE of 4.6%. Ultimately, that's a low return and it under-performs the Medical Equipment industry average of 8.5%.

Check out our latest analysis for AVE Science&TechnologyLTD

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'd like to look at how AVE Science&TechnologyLTD has performed in the past in other metrics, you can view this free graph of AVE Science&TechnologyLTD's past earnings, revenue and cash flow.

How Are Returns Trending?

On the surface, the trend of ROCE at AVE Science&TechnologyLTD doesn't inspire confidence. To be more specific, ROCE has fallen from 13% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From AVE Science&TechnologyLTD's ROCE

Bringing it all together, while we're somewhat encouraged by AVE Science&TechnologyLTD's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 33% over the last year, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you'd like to know more about AVE Science&TechnologyLTD, we've spotted 3 warning signs, and 2 of them don't sit too well with us.

While AVE Science&TechnologyLTD 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.