Be Wary Of Anhui Coreach TechnologyLtd (SZSE:002983) And Its Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Anhui Coreach TechnologyLtd (SZSE:002983) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on Anhui Coreach TechnologyLtd is:

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

0.11 = CN¥157m ÷ (CN¥1.8b - CN¥406m) (Based on the trailing twelve months to March 2024).

Therefore, Anhui Coreach TechnologyLtd has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Electrical industry average of 5.9% it's much better.

See our latest analysis for Anhui Coreach TechnologyLtd

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

What Does the ROCE Trend For Anhui Coreach TechnologyLtd Tell Us?

On the surface, the trend of ROCE at Anhui Coreach TechnologyLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 17% over the last five years. However it looks like Anhui Coreach TechnologyLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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 related note, Anhui Coreach TechnologyLtd has decreased its current liabilities to 22% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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.

In Conclusion...

To conclude, we've found that Anhui Coreach TechnologyLtd is reinvesting in the business, but returns have been falling. And investors may be recognizing these trends since the stock has only returned a total of 17% to shareholders over the last three years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you'd like to know about the risks facing Anhui Coreach TechnologyLtd, we've discovered 1 warning sign that you should be aware of.

While Anhui Coreach TechnologyLtd 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.