Returns On Capital Signal Tricky Times Ahead For AAC Technologies Holdings (HKG:2018)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Having said that, from a first glance at AAC Technologies Holdings (HKG:2018) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for AAC Technologies Holdings, this is the formula:

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

0.028 = CN¥907m ÷ (CN¥41b - CN¥8.0b) (Based on the trailing twelve months to September 2022).

Therefore, AAC Technologies Holdings has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 7.4%.

See our latest analysis for AAC Technologies Holdings

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'd like to see what analysts are forecasting going forward, you should check out our free report for AAC Technologies Holdings.

What Can We Tell From AAC Technologies Holdings' ROCE Trend?

When we looked at the ROCE trend at AAC Technologies Holdings, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 2.8% from 37% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, AAC Technologies Holdings has decreased its current liabilities to 20% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On AAC Technologies Holdings' ROCE

While returns have fallen for AAC Technologies Holdings in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. But since the stock has dived 87% in the last five years, there could be other drivers that are influencing the business' outlook. Regardless, reinvestment can pay off in the long run, so we think astute investors may want to look further into this stock.

AAC Technologies Holdings does have some risks though, and we've spotted 1 warning sign for AAC Technologies Holdings that you might be interested in.

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.