Some Investors May Be Worried About AnHui Jinchun Nonwoven's (SZSE:300877) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think AnHui Jinchun Nonwoven (SZSE:300877) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. To calculate this metric for AnHui Jinchun Nonwoven, this is the formula:

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

0.0099 = CN¥16m ÷ (CN¥1.8b - CN¥235m) (Based on the trailing twelve months to September 2024).

Therefore, AnHui Jinchun Nonwoven has an ROCE of 1.0%. Ultimately, that's a low return and it under-performs the Luxury industry average of 6.5%.

View our latest analysis for AnHui Jinchun Nonwoven

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 Jinchun Nonwoven has performed in the past in other metrics, you can view this free graph of AnHui Jinchun Nonwoven's past earnings, revenue and cash flow.

What Does the ROCE Trend For AnHui Jinchun Nonwoven Tell Us?

In terms of AnHui Jinchun Nonwoven's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 19% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, AnHui Jinchun Nonwoven has decreased its current liabilities to 13% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

While returns have fallen for AnHui Jinchun Nonwoven in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 41% in the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you'd like to know more about AnHui Jinchun Nonwoven, we've spotted 2 warning signs, and 1 of them doesn't sit too well with us.

While AnHui Jinchun Nonwoven 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.