Capital Allocation Trends At Anhui Kouzi Distillery (SHSE:603589) Aren't Ideal

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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, while the ROCE is currently high for Anhui Kouzi Distillery (SHSE:603589), we aren't jumping out of our chairs because returns are decreasing.

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. The formula for this calculation on Anhui Kouzi Distillery is:

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

0.24 = CN¥2.3b ÷ (CN¥12b - CN¥2.4b) (Based on the trailing twelve months to September 2023).

Therefore, Anhui Kouzi Distillery has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Beverage industry average of 13%.

View our latest analysis for Anhui Kouzi Distillery

In the above chart we have measured Anhui Kouzi Distillery's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Anhui Kouzi Distillery for free.

What Does the ROCE Trend For Anhui Kouzi Distillery Tell Us?

When we looked at the ROCE trend at Anhui Kouzi Distillery, we didn't gain much confidence. Historically returns on capital were even higher at 32%, but they have dropped over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Anhui Kouzi Distillery is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 29% in the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Anhui Kouzi Distillery does have some risks though, and we've spotted 1 warning sign for Anhui Kouzi Distillery that you might be interested in.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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.