Investors Met With Slowing Returns on Capital At Anhui Honglu Steel Construction(Group) (SZSE:002541)

What trends should we look for it we want to identify stocks that can 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Anhui Honglu Steel Construction(Group) (SZSE:002541), 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. Analysts use this formula to calculate it for Anhui Honglu Steel Construction(Group):

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

0.076 = CN¥1.2b ÷ (CN¥24b - CN¥8.3b) (Based on the trailing twelve months to March 2024).

So, Anhui Honglu Steel Construction(Group) has an ROCE of 7.6%. In absolute terms, that's a low return but it's around the Metals and Mining industry average of 6.7%.

View our latest analysis for Anhui Honglu Steel Construction(Group)

Above you can see how the current ROCE for Anhui Honglu Steel Construction(Group) 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 Honglu Steel Construction(Group) for free.

The Trend Of ROCE

The returns on capital haven't changed much for Anhui Honglu Steel Construction(Group) in recent years. The company has consistently earned 7.6% for the last five years, and the capital employed within the business has risen 196% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 35% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Bottom Line On Anhui Honglu Steel Construction(Group)'s ROCE

Long story short, while Anhui Honglu Steel Construction(Group) has been reinvesting its capital, the returns that it's generating haven't increased. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 152% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Anhui Honglu Steel Construction(Group) (of which 1 is significant!) that you should know about.

While Anhui Honglu Steel Construction(Group) 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.

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