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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Anhui Jinhe IndustrialLtd (SZSE:002597), we don't think it's current trends fit the mold of a multi-bagger.

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. To calculate this metric for Anhui Jinhe IndustrialLtd, this is the formula:

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

0.066 = CN¥548m ÷ (CN¥10b - CN¥2.0b) (Based on the trailing twelve months to March 2024).

Therefore, Anhui Jinhe IndustrialLtd has an ROCE of 6.6%. In absolute terms, that's a low return, but it's much better than the Chemicals industry average of 5.5%.

In the above chart we have measured Anhui Jinhe IndustrialLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Anhui Jinhe IndustrialLtd for free.

What Does the ROCE Trend For Anhui Jinhe IndustrialLtd Tell Us?

When we looked at the ROCE trend at Anhui Jinhe IndustrialLtd, we didn't gain much confidence. To be more specific, ROCE has fallen from 19% over the last five years. 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 Anhui Jinhe IndustrialLtd's ROCE

In summary, we're somewhat concerned by Anhui Jinhe IndustrialLtd's diminishing returns on increasing amounts of capital. Despite the concerning underlying trends, the stock has actually gained 26% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you'd like to know about the risks facing Anhui Jinhe IndustrialLtd, we've discovered 2 warning signs that you should be aware of.

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.