Anhui XDLK Microsystem (SHSE:688582) Could Be Struggling To Allocate Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Anhui XDLK Microsystem (SHSE:688582), we don't think it's current trends fit the mold of a multi-bagger.

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

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. Analysts use this formula to calculate it for Anhui XDLK Microsystem:

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

0.075 = CN¥168m ÷ (CN¥2.3b - CN¥43m) (Based on the trailing twelve months to September 2024).

So, Anhui XDLK Microsystem has an ROCE of 7.5%. In absolute terms, that's a low return, but it's much better than the Electronic industry average of 5.5%.

See our latest analysis for Anhui XDLK Microsystem

Above you can see how the current ROCE for Anhui XDLK Microsystem compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Anhui XDLK Microsystem .

So How Is Anhui XDLK Microsystem's ROCE Trending?

On the surface, the trend of ROCE at Anhui XDLK Microsystem doesn't inspire confidence. Over the last four years, returns on capital have decreased to 7.5% from 12% four 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. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On Anhui XDLK Microsystem's ROCE

While returns have fallen for Anhui XDLK Microsystem in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has followed suit returning a meaningful 40% to shareholders over the last year. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

One more thing to note, we've identified 1 warning sign with Anhui XDLK Microsystem and understanding this should be part of your investment process.

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.