Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Anfu CE LINK (SZSE:300787) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Anfu CE LINK is:

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

0.041 = CN¥89m ÷ (CN¥3.5b - CN¥1.3b) (Based on the trailing twelve months to June 2024).

Thus, Anfu CE LINK has an ROCE of 4.1%. Ultimately, that's a low return and it under-performs the Tech industry average of 5.7%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Anfu CE LINK's ROCE against it's prior returns. If you'd like to look at how Anfu CE LINK has performed in the past in other metrics, you can view this free graph of Anfu CE LINK's past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of Anfu CE LINK's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 4.1% from 21% five years ago. However it looks like Anfu CE LINK might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Anfu CE LINK's reinvestment in its own business, we're aware that returns are shrinking. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. Therefore based on the analysis done in this article, we don't think Anfu CE LINK has the makings of a multi-bagger.

Anfu CE LINK does have some risks though, and we've spotted 4 warning signs for Anfu CE LINK that you might be interested in.

While Anfu CE LINK 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.