What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think AAC Technologies Holdings (HKG:2018) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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 AAC Technologies Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.064 = CN¥1.9b ÷ (CN¥39b - CN¥9.4b) (Based on the trailing twelve months to March 2021).
So, AAC Technologies Holdings has an ROCE of 6.4%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 8.2%.
Above you can see how the current ROCE for AAC Technologies Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What The Trend Of ROCE Can Tell Us
In terms of AAC Technologies Holdings' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 6.4% from 27% five years ago. 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.
Our Take On AAC Technologies Holdings' ROCE
In summary, AAC Technologies Holdings is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And in the last five years, the stock has given away 32% so the market doesn't look too hopeful on these trends strengthening any time soon. 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 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.
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