Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Although, when we looked at Anker Innovations (SZSE:300866), it didn't seem to tick all of these boxes.
What Is 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 Anker Innovations is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = CN¥1.3b ÷ (CN¥13b - CN¥4.2b) (Based on the trailing twelve months to September 2023).
Therefore, Anker Innovations has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 5.1% generated by the Tech industry.
Above you can see how the current ROCE for Anker Innovations 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 Anker Innovations here for free.
What Does the ROCE Trend For Anker Innovations Tell Us?
Unfortunately, the trend isn't great with ROCE falling from 37% five years ago, while capital employed has grown 567%. Usually this isn't ideal, but given Anker Innovations conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Anker Innovations' earnings and if they change as a result from the capital raise.
The Key Takeaway
In summary, despite lower returns in the short term, we're encouraged to see that Anker Innovations is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 51% in the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
One more thing, we've spotted 2 warning signs facing Anker Innovations that you might find interesting.
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.