Investors Could Be Concerned With ANJI Technology's (TWSE:6477) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at ANJI Technology (TWSE:6477), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on ANJI Technology is:

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

0.031 = NT$201m ÷ (NT$8.0b - NT$1.6b) (Based on the trailing twelve months to March 2024).

Therefore, ANJI Technology has an ROCE of 3.1%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 8.0%.

See our latest analysis for ANJI Technology

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're interested in investigating ANJI Technology's past further, check out this free graph covering ANJI Technology's past earnings, revenue and cash flow.

So How Is ANJI Technology's ROCE Trending?

When we looked at the ROCE trend at ANJI Technology, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 3.1% from 9.7% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

In Conclusion...

In summary, we're somewhat concerned by ANJI Technology's diminishing returns on increasing amounts of capital. Since the stock has skyrocketed 106% over the last five years, it looks like investors have high expectations of the stock. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

One more thing: We've identified 5 warning signs with ANJI Technology (at least 3 which make us uncomfortable) , and understanding these would certainly be useful.

While ANJI Technology 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.

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