Anhui Jinhe IndustrialLtd (SZSE:002597) Might Be Having Difficulty Using Its Capital Effectively

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Anhui Jinhe IndustrialLtd (SZSE:002597), we don't think it's current trends fit the mold of a multi-bagger.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Anhui Jinhe IndustrialLtd is:

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).

Thus, Anhui Jinhe IndustrialLtd has an ROCE of 6.2%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.5%.

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.

How Are Returns Trending?

In terms of Anhui Jinhe IndustrialLtd's historical ROCE movements, the trend isn't fantastic. 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 with the stock having returned a mere 2.6% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with Anhui Jinhe IndustrialLtd (including 1 which is a bit unpleasant) .

While Anhui Jinhe IndustrialLtd 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.