Anhui Jinhe IndustrialLtd's (SZSE:002597) Returns On Capital Not Reflecting Well On The Business

There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Anhui Jinhe IndustrialLtd (SZSE:002597) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for Anhui Jinhe IndustrialLtd, this is the formula:

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

0.066 = CN¥548m ÷ (CN¥10b - CN¥2.0b) (Based on the trailing twelve months to March 2024).

Therefore, Anhui Jinhe IndustrialLtd has an ROCE of 6.6%. On its own that's a low return, but compared to the average of 5.5% generated by the Chemicals industry, it's much better.

Check out 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 to see what analysts are forecasting going forward, you should check out our free analyst report for Anhui Jinhe IndustrialLtd .

The Trend Of ROCE

On the surface, the trend of ROCE at Anhui Jinhe IndustrialLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 19% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

In Conclusion...

We're a bit apprehensive about Anhui Jinhe IndustrialLtd because despite more capital being deployed in the business, returns on that capital and sales have both fallen. In spite of that, the stock has delivered a 19% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

One more thing, we've spotted 2 warning signs facing Anhui Jinhe IndustrialLtd that you might find interesting.

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.

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