Returns On Capital Are Showing Encouraging Signs At Anxian Yuan China Holdings (HKG:922)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Speaking of which, we noticed some great changes in Anxian Yuan China Holdings' (HKG:922) returns on capital, so let's have a look.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Anxian Yuan China Holdings, this is the formula:

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

0.091 = HK$98m ÷ (HK$1.2b - HK$153m) (Based on the trailing twelve months to September 2022).

Therefore, Anxian Yuan China Holdings has an ROCE of 9.1%. Even though it's in line with the industry average of 8.7%, it's still a low return by itself.

Check out the opportunities and risks within the HK Consumer Services industry.

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

What Does the ROCE Trend For Anxian Yuan China Holdings Tell Us?

Anxian Yuan China Holdings has not disappointed with their ROCE growth. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 127% over the last five years. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

In Conclusion...

As discussed above, Anxian Yuan China Holdings appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Although the company may be facing some issues elsewhere since the stock has plunged 82% in the last five years. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

Anxian Yuan China Holdings does have some risks though, and we've spotted 2 warning signs for Anxian Yuan China Holdings that you might be interested in.

While Anxian Yuan China Holdings 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.