Anhui Fuhuang Steel Structure (SZSE:002743) Could Be Struggling To Allocate Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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 Fuhuang Steel Structure (SZSE:002743) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on Anhui Fuhuang Steel Structure is:

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

0.064 = CN¥268m ÷ (CN¥11b - CN¥6.3b) (Based on the trailing twelve months to September 2023).

So, Anhui Fuhuang Steel Structure has an ROCE of 6.4%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.3%.

Check out our latest analysis for Anhui Fuhuang Steel Structure

Historical performance is a great place to start when researching a stock so above you can see the gauge for Anhui Fuhuang Steel Structure's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Anhui Fuhuang Steel Structure.

What Can We Tell From Anhui Fuhuang Steel Structure's ROCE Trend?

When we looked at the ROCE trend at Anhui Fuhuang Steel Structure, we didn't gain much confidence. To be more specific, ROCE has fallen from 8.1% over the last five years. However it looks like Anhui Fuhuang Steel Structure might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Anhui Fuhuang Steel Structure's current liabilities are still rather high at 60% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

In summary, Anhui Fuhuang Steel Structure is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And in the last five years, the stock has given away 30% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with Anhui Fuhuang Steel Structure (including 1 which is a bit unpleasant) .

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.