Here's What To Make Of Anhui Genuine NewMaterialsLtd's (SHSE:603429) Decelerating Rates Of Return

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. That's why when we briefly looked at Anhui Genuine NewMaterialsLtd's (SHSE:603429) ROCE trend, we were pretty happy with what we saw.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Anhui Genuine NewMaterialsLtd:

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

0.12 = CN¥198m ÷ (CN¥1.9b - CN¥313m) (Based on the trailing twelve months to September 2023).

So, Anhui Genuine NewMaterialsLtd has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 15% generated by the Tobacco industry.

View our latest analysis for Anhui Genuine NewMaterialsLtd

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 Genuine NewMaterialsLtd has performed in the past in other metrics, you can view this free graph of Anhui Genuine NewMaterialsLtd's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

While the returns on capital are good, they haven't moved much. The company has employed 160% more capital in the last five years, and the returns on that capital have remained stable at 12%. Since 12% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

On a side note, Anhui Genuine NewMaterialsLtd has done well to reduce current liabilities to 16% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

What We Can Learn From Anhui Genuine NewMaterialsLtd's ROCE

The main thing to remember is that Anhui Genuine NewMaterialsLtd has proven its ability to continually reinvest at respectable rates of return. However, despite the favorable fundamentals, the stock has fallen 41% over the last five years, so there might be an opportunity here for astute investors. For that reason, savvy investors might want to look further into this company in case it's a prime investment.

Anhui Genuine NewMaterialsLtd could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 603429 on our platform quite valuable.

While Anhui Genuine NewMaterialsLtd 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.