If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Anhui Xinbo Aluminum (SZSE:003038), it didn't seem to tick all of these boxes.
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. The formula for this calculation on Anhui Xinbo Aluminum is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.07 = CN¥272m ÷ (CN¥9.9b - CN¥6.0b) (Based on the trailing twelve months to September 2024).
Thus, Anhui Xinbo Aluminum has an ROCE of 7.0%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.8%.
Above you can see how the current ROCE for Anhui Xinbo Aluminum compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Anhui Xinbo Aluminum for free.
What Can We Tell From Anhui Xinbo Aluminum's ROCE Trend?
Unfortunately, the trend isn't great with ROCE falling from 22% five years ago, while capital employed has grown 1,150%. 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 Xinbo Aluminum's earnings and if they change as a result from the capital raise.
While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 61%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 7.0%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.
What We Can Learn From Anhui Xinbo Aluminum's ROCE
While returns have fallen for Anhui Xinbo Aluminum in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These growth trends haven't led to growth returns though, since the stock has fallen 66% over the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
Anhui Xinbo Aluminum does come with some risks though, we found 5 warning signs in our investment analysis, and 2 of those are significant...
While Anhui Xinbo Aluminum 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.