Some Investors May Be Worried About ANJI Technology's (TWSE:6477) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Having said that, from a first glance at ANJI Technology (TWSE:6477) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on ANJI Technology is:

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

0.019 = NT$126m ÷ (NT$8.2b - NT$1.5b) (Based on the trailing twelve months to June 2024).

So, ANJI Technology has an ROCE of 1.9%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 9.1%.

See our latest analysis for ANJI Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for ANJI Technology's ROCE against it's prior returns. 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.

What The Trend Of ROCE Can Tell Us

In terms of ANJI Technology's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 1.9% from 9.5% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

Our Take On ANJI Technology's ROCE

In summary, we're somewhat concerned by ANJI Technology's diminishing returns on increasing amounts of capital. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 62% return. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you want to continue researching ANJI Technology, you might be interested to know about the 3 warning signs that our analysis has discovered.

While ANJI Technology may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.