If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at An Hui Wenergy (SZSE:000543), it didn't seem to tick all of these boxes.
Understanding 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 An Hui Wenergy, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.015 = CN¥717m ÷ (CN¥60b - CN¥12b) (Based on the trailing twelve months to September 2023).
Thus, An Hui Wenergy has an ROCE of 1.5%. Ultimately, that's a low return and it under-performs the Renewable Energy industry average of 5.6%.
View our latest analysis for An Hui Wenergy
Above you can see how the current ROCE for An Hui Wenergy compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
So How Is An Hui Wenergy's ROCE Trending?
In terms of An Hui Wenergy's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 2.8% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.
The Bottom Line On An Hui Wenergy's ROCE
To conclude, we've found that An Hui Wenergy is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 47% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
On a final note, we found 2 warning signs for An Hui Wenergy (1 is concerning) you should be aware of.
While An Hui Wenergy 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.