AAC Technologies Holdings' (HKG:2018) Returns On Capital Not Reflecting Well On The Business

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at AAC Technologies Holdings (HKG:2018), it didn't seem to tick all of these boxes.

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 AAC Technologies Holdings is:

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

0.034 = CN¥1.1b ÷ (CN¥44b - CN¥12b) (Based on the trailing twelve months to June 2024).

So, AAC Technologies Holdings has an ROCE of 3.4%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 7.4%.

Check out our latest analysis for AAC Technologies Holdings

In the above chart we have measured AAC Technologies Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering AAC Technologies Holdings for free.

So How Is AAC Technologies Holdings' ROCE Trending?

On the surface, the trend of ROCE at AAC Technologies Holdings doesn't inspire confidence. Around five years ago the returns on capital were 14%, but since then they've fallen to 3.4%. 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 may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From AAC Technologies Holdings' ROCE

To conclude, we've found that AAC Technologies Holdings is reinvesting in the business, but returns have been falling. Since the stock has declined 34% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you're still interested in AAC Technologies Holdings it's worth checking out our FREE intrinsic value approximation for 2018 to see if it's trading at an attractive price in other respects.

While AAC Technologies 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.