There are a few key trends to look for if we want to identify the next multi-bagger. 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 Accelink Technologies CoLtd (SZSE:002281) 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)
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 Accelink Technologies CoLtd, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.04 = CN¥342m ÷ (CN¥12b - CN¥3.0b) (Based on the trailing twelve months to June 2023).
Therefore, Accelink Technologies CoLtd has an ROCE of 4.0%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 5.3%.
View our latest analysis for Accelink Technologies CoLtd
Above you can see how the current ROCE for Accelink Technologies CoLtd 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 Accelink Technologies CoLtd.
So How Is Accelink Technologies CoLtd's ROCE Trending?
When we looked at the ROCE trend at Accelink Technologies CoLtd, we didn't gain much confidence. Around five years ago the returns on capital were 8.0%, but since then they've fallen to 4.0%. 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.
On a related note, Accelink Technologies CoLtd has decreased its current liabilities to 26% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
Our Take On Accelink Technologies CoLtd's ROCE
In summary, we're somewhat concerned by Accelink Technologies CoLtd's diminishing returns on increasing amounts of capital. However the stock has delivered a 51% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.
On a separate note, we've found 3 warning signs for Accelink Technologies CoLtd you'll probably want to know about.
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.