Anhui Wanwei Updated High-Tech Material IndustryLtd (SHSE:600063) Will Be Hoping To Turn Its Returns On Capital Around

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Anhui Wanwei Updated High-Tech Material IndustryLtd (SHSE:600063) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

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 Wanwei Updated High-Tech Material IndustryLtd is:

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

0.0094 = CN¥81m ÷ (CN¥14b - CN¥5.8b) (Based on the trailing twelve months to June 2024).

Therefore, Anhui Wanwei Updated High-Tech Material IndustryLtd has an ROCE of 0.9%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 5.5%.

View our latest analysis for Anhui Wanwei Updated High-Tech Material IndustryLtd

Above you can see how the current ROCE for Anhui Wanwei Updated High-Tech Material IndustryLtd 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 Wanwei Updated High-Tech Material IndustryLtd for free.

What Does the ROCE Trend For Anhui Wanwei Updated High-Tech Material IndustryLtd Tell Us?

In terms of Anhui Wanwei Updated High-Tech Material IndustryLtd's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 6.3%, but since then they've fallen to 0.9%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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 Wanwei Updated High-Tech Material IndustryLtd's current liabilities are still rather high at 40% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

In summary, we're somewhat concerned by Anhui Wanwei Updated High-Tech Material IndustryLtd's diminishing returns on increasing amounts of capital. In spite of that, the stock has delivered a 17% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Anhui Wanwei Updated High-Tech Material IndustryLtd does have some risks though, and we've spotted 3 warning signs for Anhui Wanwei Updated High-Tech Material IndustryLtd that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.