There Are Reasons To Feel Uneasy About AAC Technologies Holdings' (HKG:2018) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating AAC Technologies Holdings (HKG:2018), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

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)

0.056 = CN¥1.8b ÷ (CN¥42b - CN¥9.0b) (Based on the trailing twelve months to September 2021).

Thus, AAC Technologies Holdings has an ROCE of 5.6%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 7.9%.

View 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, you can check out the forecasts from the analysts covering AAC Technologies Holdings here for free.

The Trend Of ROCE

In terms of AAC Technologies Holdings' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 30% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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

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 investors appear hesitant that the trends will pick up because the stock has fallen 69% in the last five years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Like most companies, AAC Technologies Holdings does come with some risks, and we've found 1 warning sign that you should be aware of.

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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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.