Here's What's Concerning About Anhui Tongyuan Environment Energy SavingLtd's (SHSE:688679) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Anhui Tongyuan Environment Energy SavingLtd (SHSE:688679) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Anhui Tongyuan Environment Energy SavingLtd, this is the formula:

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

0.017 = CN¥22m ÷ (CN¥2.8b - CN¥1.5b) (Based on the trailing twelve months to June 2024).

So, Anhui Tongyuan Environment Energy SavingLtd has an ROCE of 1.7%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 5.6%.

See our latest analysis for Anhui Tongyuan Environment Energy SavingLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Anhui Tongyuan Environment Energy SavingLtd's ROCE against it's prior returns. If you'd like to look at how Anhui Tongyuan Environment Energy SavingLtd has performed in the past in other metrics, you can view this free graph of Anhui Tongyuan Environment Energy SavingLtd's past earnings, revenue and cash flow.

What Can We Tell From Anhui Tongyuan Environment Energy SavingLtd's ROCE Trend?

In terms of Anhui Tongyuan Environment Energy SavingLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 1.7% from 14% five years ago. However it looks like Anhui Tongyuan Environment Energy SavingLtd 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 may take some time before the company starts to see any change in earnings from these investments.

Another thing to note, Anhui Tongyuan Environment Energy SavingLtd has a high ratio of current liabilities to total assets of 54%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

In summary, Anhui Tongyuan Environment Energy SavingLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 22% over the last three years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you want to know some of the risks facing Anhui Tongyuan Environment Energy SavingLtd we've found 2 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

While Anhui Tongyuan Environment Energy SavingLtd 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.