What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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 briefly looking over the numbers, we don't think Anhui Zhongyuan New Materials (SHSE:603527) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Anhui Zhongyuan New Materials, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.049 = CN¥108m ÷ (CN¥3.1b - CN¥837m) (Based on the trailing twelve months to September 2023).
So, Anhui Zhongyuan New Materials has an ROCE of 4.9%. Ultimately, that's a low return and it under-performs the Electrical industry average of 6.5%.
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Anhui Zhongyuan New Materials has performed in the past in other metrics, you can view this free graph of Anhui Zhongyuan New Materials' past earnings, revenue and cash flow.
The Trend Of ROCE
We weren't thrilled with the trend because Anhui Zhongyuan New Materials' ROCE has reduced by 61% over the last five years, while the business employed 159% more capital. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Anhui Zhongyuan New Materials' earnings and if they change as a result from the capital raise.
The Key Takeaway
In summary, Anhui Zhongyuan New Materials is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors may be recognizing these trends since the stock has only returned a total of 14% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
If you want to know some of the risks facing Anhui Zhongyuan New Materials we've found 3 warning signs (1 is significant!) that you should be aware of before investing here.
While Anhui Zhongyuan New Materials 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.