There Are Reasons To Feel Uneasy About Anhui Hongyu Wuzhou Medical ManufacturerLTD's (SZSE:301234) Returns On Capital

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Anhui Hongyu Wuzhou Medical ManufacturerLTD (SZSE:301234) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Anhui Hongyu Wuzhou Medical ManufacturerLTD is:

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

0.064 = CN¥49m ÷ (CN¥834m - CN¥64m) (Based on the trailing twelve months to March 2024).

Thus, Anhui Hongyu Wuzhou Medical ManufacturerLTD has an ROCE of 6.4%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.3%.

View our latest analysis for Anhui Hongyu Wuzhou Medical ManufacturerLTD

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're interested in investigating Anhui Hongyu Wuzhou Medical ManufacturerLTD's past further, check out this free graph covering Anhui Hongyu Wuzhou Medical ManufacturerLTD's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Anhui Hongyu Wuzhou Medical ManufacturerLTD doesn't inspire confidence. To be more specific, ROCE has fallen from 31% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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.

On a related note, Anhui Hongyu Wuzhou Medical ManufacturerLTD has decreased its current liabilities to 7.7% of total assets. That could partly explain why the ROCE has dropped. 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Anhui Hongyu Wuzhou Medical ManufacturerLTD's ROCE

To conclude, we've found that Anhui Hongyu Wuzhou Medical ManufacturerLTD is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 29% in the last year. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

On a separate note, we've found 1 warning sign for Anhui Hongyu Wuzhou Medical ManufacturerLTD you'll probably want to know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and 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.