Investors Could Be Concerned With Anacle Systems' (HKG:8353) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. So while Anacle Systems (HKG:8353) has a high ROCE right now, lets see what we can decipher from how returns are changing.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Anacle Systems:

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

0.23 = S$3.5m ÷ (S$19m - S$3.6m) (Based on the trailing twelve months to February 2021).

Thus, Anacle Systems has an ROCE of 23%. That's a fantastic return and not only that, it outpaces the average of 4.9% earned by companies in a similar industry.

See our latest analysis for Anacle Systems

Historical performance is a great place to start when researching a stock so above you can see the gauge for Anacle Systems' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Anacle Systems, check out these free graphs here.

How Are Returns Trending?

When we looked at the ROCE trend at Anacle Systems, we didn't gain much confidence. While it's comforting that the ROCE is high, five years ago it was 40%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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.

The Bottom Line

To conclude, we've found that Anacle Systems is reinvesting in the business, but returns have been falling. And in the last three years, the stock has given away 51% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

On a final note, we've found 3 warning signs for Anacle Systems that we think you should be aware of.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. 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.
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