Returns On Capital Signal Tricky Times Ahead For Anhui Genuine NewMaterialsLtd (SHSE:603429)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Anhui Genuine NewMaterialsLtd (SHSE:603429) 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)?

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 Genuine NewMaterialsLtd, this is the formula:

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

0.12 = CN¥188m ÷ (CN¥1.8b - CN¥218m) (Based on the trailing twelve months to March 2024).

Thus, Anhui Genuine NewMaterialsLtd has an ROCE of 12%. That's a pretty standard return and it's in line with the industry average of 12%.

Check out our latest analysis for Anhui Genuine NewMaterialsLtd

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

So How Is Anhui Genuine NewMaterialsLtd's ROCE Trending?

In terms of Anhui Genuine NewMaterialsLtd's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 20% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, Anhui Genuine NewMaterialsLtd has done well to pay down its current liabilities to 12% of total assets. So we could link some of this to the decrease in ROCE. 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. 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 On Anhui Genuine NewMaterialsLtd's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Anhui Genuine NewMaterialsLtd have fallen, meanwhile the business is employing more capital than it was five years ago. Long term shareholders who've owned the stock over the last five years have experienced a 69% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you'd like to know more about Anhui Genuine NewMaterialsLtd, we've spotted 4 warning signs, and 1 of them is a bit concerning.

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.

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