Anhui Kouzi Distillery (SHSE:603589) Could Be Struggling To Allocate Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. So while Anhui Kouzi Distillery (SHSE:603589) has a high ROCE right now, lets see what we can decipher from how returns are changing.

What Is 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. To calculate this metric for Anhui Kouzi Distillery, this is the formula:

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

0.21 = CN¥2.2b ÷ (CN¥13b - CN¥2.3b) (Based on the trailing twelve months to September 2024).

Thus, Anhui Kouzi Distillery has an ROCE of 21%. On its own, that's a very good return and it's on par with the returns earned by companies in a similar industry.

See our latest analysis for Anhui Kouzi Distillery

Above you can see how the current ROCE for Anhui Kouzi Distillery compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Anhui Kouzi Distillery for free.

How Are Returns Trending?

In terms of Anhui Kouzi Distillery's historical ROCE movements, the trend isn't fantastic. Historically returns on capital were even higher at 31%, but they have dropped over the last five years. However it looks like Anhui Kouzi Distillery 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.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Anhui Kouzi Distillery's reinvestment in its own business, we're aware that returns are shrinking. And investors may be recognizing these trends since the stock has only returned a total of 7.0% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

One more thing, we've spotted 1 warning sign facing Anhui Kouzi Distillery that you might find interesting.

Anhui Kouzi Distillery is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.