Hangzhou Anysoft Information Technology's (SZSE:300571) Returns On Capital Not Reflecting Well On The Business

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Hangzhou Anysoft Information Technology (SZSE:300571) and its ROCE trend, we weren't exactly thrilled.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Hangzhou Anysoft Information Technology is:

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

0.023 = CN¥47m ÷ (CN¥3.9b - CN¥1.9b) (Based on the trailing twelve months to September 2024).

Therefore, Hangzhou Anysoft Information Technology has an ROCE of 2.3%. Ultimately, that's a low return and it under-performs the Communications industry average of 4.0%.

Check out our latest analysis for Hangzhou Anysoft Information Technology

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Hangzhou Anysoft Information Technology.

What Can We Tell From Hangzhou Anysoft Information Technology's ROCE Trend?

In terms of Hangzhou Anysoft Information Technology's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 38% 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.

Another thing to note, Hangzhou Anysoft Information Technology has a high ratio of current liabilities to total assets of 49%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Hangzhou Anysoft Information Technology's ROCE

Bringing it all together, while we're somewhat encouraged by Hangzhou Anysoft Information Technology's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 32% in the last five years. Therefore based on the analysis done in this article, we don't think Hangzhou Anysoft Information Technology has the makings of a multi-bagger.

On a separate note, we've found 3 warning signs for Hangzhou Anysoft Information Technology you'll probably want to know about.

While Hangzhou Anysoft Information Technology 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.