What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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 Huilong Agricultural Means of ProductionLtd (SZSE:002556) 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?

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. Analysts use this formula to calculate it for Anhui Huilong Agricultural Means of ProductionLtd:

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

0.011 = CN¥68m ÷ (CN¥11b - CN¥5.1b) (Based on the trailing twelve months to June 2024).

So, Anhui Huilong Agricultural Means of ProductionLtd has an ROCE of 1.1%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 5.5%.

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 Huilong Agricultural Means of ProductionLtd has performed in the past in other metrics, you can view this free graph of Anhui Huilong Agricultural Means of ProductionLtd's past earnings, revenue and cash flow.

What Can We Tell From Anhui Huilong Agricultural Means of ProductionLtd's ROCE Trend?

In terms of Anhui Huilong Agricultural Means of ProductionLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 1.1% from 13% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Anhui Huilong Agricultural Means of ProductionLtd has done well to pay down its current liabilities to 46% of total assets. So we could link some of this to the decrease in ROCE. 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. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

The Bottom Line On Anhui Huilong Agricultural Means of ProductionLtd's ROCE

Bringing it all together, while we're somewhat encouraged by Anhui Huilong Agricultural Means of ProductionLtd'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 11% in the last five years. Therefore based on the analysis done in this article, we don't think Anhui Huilong Agricultural Means of ProductionLtd has the makings of a multi-bagger.

One more thing: We've identified 6 warning signs with Anhui Huilong Agricultural Means of ProductionLtd (at least 3 which can't be ignored) , and understanding these would certainly be useful.

While Anhui Huilong Agricultural Means of ProductionLtd 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.