Returns On Capital At Anhui Truchum Advanced Materials and Technology (SZSE:002171) Paint A Concerning Picture

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Anhui Truchum Advanced Materials and Technology (SZSE:002171) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. Analysts use this formula to calculate it for Anhui Truchum Advanced Materials and Technology:

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

0.029 = CN¥277m ÷ (CN¥19b - CN¥9.9b) (Based on the trailing twelve months to September 2024).

Thus, Anhui Truchum Advanced Materials and Technology has an ROCE of 2.9%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 6.8%.

Check out our latest analysis for Anhui Truchum Advanced Materials and Technology

In the above chart we have measured Anhui Truchum Advanced Materials and Technology'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 Truchum Advanced Materials and Technology for free.

What The Trend Of ROCE Can Tell Us

In terms of Anhui Truchum Advanced Materials and Technology's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 5.2%, but since then they've fallen to 2.9%. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 51%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Anhui Truchum Advanced Materials and Technology. And the stock has followed suit returning a meaningful 49% to shareholders over the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you'd like to know more about Anhui Truchum Advanced Materials and Technology, we've spotted 4 warning signs, and 2 of them are potentially serious.

While Anhui Truchum Advanced Materials and Technology 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.