Anhui Zhongyuan New Materials (SHSE:603527) Could Be Struggling To Allocate Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. 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. The formula for this calculation on Anhui Zhongyuan New Materials is:

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

0.056 = CN¥129m ÷ (CN¥3.1b - CN¥827m) (Based on the trailing twelve months to March 2024).

Thus, Anhui Zhongyuan New Materials has an ROCE of 5.6%. Even though it's in line with the industry average of 6.0%, it's still a low return by itself.

View our latest analysis for Anhui Zhongyuan New Materials

Historical performance is a great place to start when researching a stock so above you can see the gauge for Anhui Zhongyuan New Materials' ROCE against it's prior returns. If you're interested in investigating Anhui Zhongyuan New Materials' past further, check out this free graph covering Anhui Zhongyuan New Materials' past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Unfortunately, the trend isn't great with ROCE falling from 11% five years ago, while capital employed has grown 156%. Usually this isn't ideal, but given Anhui Zhongyuan New Materials conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. 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 Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that Anhui Zhongyuan New Materials is reinvesting for growth and has higher sales as a result. These trends are starting to be recognized by investors since the stock has delivered a 0.8% gain to shareholders who've held over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

Anhui Zhongyuan New Materials does have some risks, we noticed 5 warning signs (and 2 which are significant) we think you should know about.

While Anhui Zhongyuan New Materials 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.