If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Anxian Yuan China Holdings' (HKG:922) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What is it?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)
0.094 = HK$104m ÷ (HK$1.3b - HK$147m) (Based on the trailing twelve months to September 2020).
Thus, Anxian Yuan China Holdings has an ROCE of 9.4%. On its own, that's a low figure but it's around the 8.1% average generated by the 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 want to delve into the historical earnings, revenue and cash flow of Anxian Yuan China Holdings, check out these free graphs here.
What The Trend Of ROCE Can Tell Us
While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The data shows that returns on capital have increased substantially over the last five years to 9.4%. The amount of capital employed has increased too, by 60%. So we're very much inspired by what we're seeing at Anxian Yuan China Holdings thanks to its ability to profitably reinvest capital.
Our Take On Anxian Yuan China Holdings' ROCE
To sum it up, Anxian Yuan China Holdings has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And since the stock has dived 88% over the last five years, there may be other factors affecting the company's prospects. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.
On a final note, we found 3 warning signs for Anxian Yuan China Holdings (1 shouldn't be ignored) you should be aware of.
While Anxian Yuan China Holdings 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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