Anhui Jinhe IndustrialLtd (SZSE:002597) Could Be Struggling To Allocate Capital

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Anhui Jinhe IndustrialLtd (SZSE:002597) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for Anhui Jinhe IndustrialLtd:

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

0.062 = CN¥539m ÷ (CN¥10b - CN¥1.6b) (Based on the trailing twelve months to September 2024).

Therefore, Anhui Jinhe IndustrialLtd has an ROCE of 6.2%. In absolute terms, that's a low return but it's around the Chemicals industry average of 5.4%.

See our latest analysis for Anhui Jinhe IndustrialLtd

Above you can see how the current ROCE for Anhui Jinhe IndustrialLtd 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 Jinhe IndustrialLtd for free.

So How Is Anhui Jinhe IndustrialLtd's ROCE Trending?

When we looked at the ROCE trend at Anhui Jinhe IndustrialLtd, we didn't gain much confidence. To be more specific, ROCE has fallen from 18% over the last five years. 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 Jinhe IndustrialLtd's ROCE

Bringing it all together, while we're somewhat encouraged by Anhui Jinhe IndustrialLtd's reinvestment in its own business, we're aware that returns are shrinking. And investors may be recognizing these trends since the stock has only returned a total of 38% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

Anhui Jinhe IndustrialLtd does have some risks, we noticed 3 warning signs (and 1 which is a bit concerning) we think you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.