The Returns On Capital At Anhui Huaertai Chemical (SZSE:001217) Don't Inspire Confidence

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Anhui Huaertai Chemical (SZSE:001217), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Anhui Huaertai Chemical, this is the formula:

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

0.071 = CN¥163m ÷ (CN¥3.6b - CN¥1.3b) (Based on the trailing twelve months to September 2024).

So, Anhui Huaertai Chemical has an ROCE of 7.1%. On its own that's a low return, but compared to the average of 5.6% generated by the Chemicals industry, it's much better.

Check out our latest analysis for Anhui Huaertai Chemical

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 Huaertai Chemical's past further, check out this free graph covering Anhui Huaertai Chemical's past earnings, revenue and cash flow.

So How Is Anhui Huaertai Chemical's ROCE Trending?

In terms of Anhui Huaertai Chemical's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 7.1% from 23% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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 On Anhui Huaertai Chemical's ROCE

To conclude, we've found that Anhui Huaertai Chemical is reinvesting in the business, but returns have been falling. And in the last three years, the stock has given away 27% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

On a final note, we found 3 warning signs for Anhui Huaertai Chemical (2 are significant) you should be aware of.

While Anhui Huaertai Chemical may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.