We Like These Underlying Return On Capital Trends At Anhui Truchum Advanced Materials and Technology (SZSE:002171)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. With that in mind, we've noticed some promising trends at Anhui Truchum Advanced Materials and Technology (SZSE:002171) so let's look a bit deeper.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Anhui Truchum Advanced Materials and Technology, this is the formula:

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

0.062 = CN¥601m ÷ (CN¥18b - CN¥8.3b) (Based on the trailing twelve months to March 2024).

Thus, Anhui Truchum Advanced Materials and Technology has an ROCE of 6.2%. In absolute terms, that's a low return but it's around the Metals and Mining industry average of 6.8%.

View our latest analysis for Anhui Truchum Advanced Materials and Technology

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'd like to look at how Anhui Truchum Advanced Materials and Technology has performed in the past in other metrics, you can view this free graph of Anhui Truchum Advanced Materials and Technology's past earnings, revenue and cash flow.

What Does the ROCE Trend For Anhui Truchum Advanced Materials and Technology Tell Us?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. Over the last five years, returns on capital employed have risen substantially to 6.2%. Basically the business is earning more per dollar of capital invested and in addition to that, 108% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 46% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.

Our Take On Anhui Truchum Advanced Materials and Technology's ROCE

To sum it up, Anhui Truchum Advanced Materials and Technology has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. With that in mind, we believe the promising trends warrant this stock for further investigation.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Anhui Truchum Advanced Materials and Technology (of which 2 are potentially serious!) that you should know about.

While Anhui Truchum Advanced Materials and Technology 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.