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. 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 Sichuan Anning Iron and TitaniumLtd (SZSE:002978), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Sichuan Anning Iron and TitaniumLtd:

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

0.17 = CN¥1.0b ÷ (CN¥6.9b - CN¥867m) (Based on the trailing twelve months to September 2023).

Therefore, Sichuan Anning Iron and TitaniumLtd has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Metals and Mining industry average of 6.7% it's much better.

In the above chart we have measured Sichuan Anning Iron and TitaniumLtd's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Sichuan Anning Iron and TitaniumLtd .

What Can We Tell From Sichuan Anning Iron and TitaniumLtd's ROCE Trend?

Unfortunately, the trend isn't great with ROCE falling from 27% five years ago, while capital employed has grown 208%. Usually this isn't ideal, but given Sichuan Anning Iron and TitaniumLtd conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. Sichuan Anning Iron and TitaniumLtd probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

On a related note, Sichuan Anning Iron and TitaniumLtd has decreased its current liabilities to 13% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Sichuan Anning Iron and TitaniumLtd's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 49% in the last three years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Sichuan Anning Iron and TitaniumLtd does have some risks, we noticed 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

While Sichuan Anning Iron and TitaniumLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.

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