Is There More Growth In Store For Anchun International Holdings' (SGX:BTX) Returns On Capital?
If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Anchun International Holdings (SGX:BTX) so let's look a bit deeper.
Understanding 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. To calculate this metric for Anchun International Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0075 = CN¥2.2m ÷ (CN¥364m - CN¥78m) (Based on the trailing twelve months to June 2020).
Therefore, Anchun International Holdings has an ROCE of 0.8%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 6.3%.
See our latest analysis for Anchun International Holdings
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Anchun International Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
Shareholders will be relieved that Anchun International Holdings has broken into profitability. The company now earns 0.8% on its capital, because five years ago it was incurring losses. 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. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.
In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 22%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Anchun International Holdings has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.The Key Takeaway
In summary, we're delighted to see that Anchun International Holdings has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And since the stock has fallen 52% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
If you want to know some of the risks facing Anchun International Holdings we've found 4 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.
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. 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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About SGX:BTX
Anchun International Holdings
An investment holding company, provides integrated chemical systems engineering and technology solutions for petrochemical and chemical industries in the People’s Republic of China.
Flawless balance sheet and good value.