There are a few key trends to look for if we want to identify the next 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Anhui Landun Photoelectron (SZSE:300862), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for Anhui Landun Photoelectron, this is the formula:

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

0.0061 = CN¥13m ÷ (CN¥2.6b - CN¥431m) (Based on the trailing twelve months to March 2024).

Therefore, Anhui Landun Photoelectron has an ROCE of 0.6%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 5.2%.

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

The Trend Of ROCE

When we looked at the ROCE trend at Anhui Landun Photoelectron, we didn't gain much confidence. To be more specific, ROCE has fallen from 18% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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.

On a related note, Anhui Landun Photoelectron has decreased its current liabilities to 17% 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. 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.

Our Take On Anhui Landun Photoelectron's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Anhui Landun Photoelectron have fallen, meanwhile the business is employing more capital than it was five years ago. It should come as no surprise then that the stock has fallen 16% over the last three years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Anhui Landun Photoelectron does have some risks, we noticed 2 warning signs (and 1 which is concerning) we think you should 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.

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