Anhui Annada Titanium Industry (SZSE:002136) May Have Issues Allocating Its Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Anhui Annada Titanium Industry (SZSE:002136) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 Annada Titanium Industry is:

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

0.13 = CN¥198m ÷ (CN¥2.0b - CN¥559m) (Based on the trailing twelve months to September 2023).

So, Anhui Annada Titanium Industry has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 5.7% generated by the Chemicals industry.

Check out our latest analysis for Anhui Annada Titanium Industry

Historical performance is a great place to start when researching a stock so above you can see the gauge for Anhui Annada Titanium Industry's ROCE against it's prior returns. If you'd like to look at how Anhui Annada Titanium Industry has performed in the past in other metrics, you can view this free graph of Anhui Annada Titanium Industry's past earnings, revenue and cash flow.

What Can We Tell From Anhui Annada Titanium Industry's ROCE Trend?

When we looked at the ROCE trend at Anhui Annada Titanium Industry, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 13% from 17% five years ago. 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 may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Anhui Annada Titanium Industry's ROCE

In summary, Anhui Annada Titanium Industry is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Unsurprisingly, the stock has only gained 22% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

If you want to know some of the risks facing Anhui Annada Titanium Industry we've found 3 warning signs (1 is potentially serious!) that you should be aware of before investing here.

While Anhui Annada Titanium Industry isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.