Returns On Capital Are Showing Encouraging Signs At Anacle Systems (HKG:8353)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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 Anacle Systems' (HKG:8353) 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. The formula for this calculation on Anacle Systems is:

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

0.033 = S$605k ÷ (S$22m - S$3.6m) (Based on the trailing twelve months to February 2024).

Thus, Anacle Systems has an ROCE of 3.3%. On its own, that's a low figure but it's around the 3.6% average generated by the Software industry.

View 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'd like to look at how Anacle Systems has performed in the past in other metrics, you can view this free graph of Anacle Systems' past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Shareholders will be relieved that Anacle Systems has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 3.3%, which is always encouraging. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. Because in the end, a business can only get so efficient.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 16% of its operations, which isn't ideal. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

The Bottom Line

To bring it all together, Anacle Systems has done well to increase the returns it's generating from its capital employed. Given the stock has declined 16% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you want to continue researching Anacle Systems, you might be interested to know about the 1 warning sign that our analysis has discovered.

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.

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