Return Trends At Anhui Fuhuang Steel Structure (SZSE:002743) Aren't Appealing

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Anhui Fuhuang Steel Structure (SZSE:002743) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Anhui Fuhuang Steel Structure:

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

0.067 = CN¥270m ÷ (CN¥11b - CN¥6.6b) (Based on the trailing twelve months to June 2024).

Thus, Anhui Fuhuang Steel Structure has an ROCE of 6.7%. Even though it's in line with the industry average of 7.0%, it's still a low return by itself.

See 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're interested in investigating Anhui Fuhuang Steel Structure's past further, check out this free graph covering Anhui Fuhuang Steel Structure's past earnings, revenue and cash flow.

How Are Returns Trending?

The returns on capital haven't changed much for Anhui Fuhuang Steel Structure in recent years. The company has employed 40% more capital in the last five years, and the returns on that capital have remained stable at 6.7%. 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.

Another thing to note, Anhui Fuhuang Steel Structure has a high ratio of current liabilities to total assets of 62%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Anhui Fuhuang Steel Structure's ROCE

Long story short, while Anhui Fuhuang Steel Structure has been reinvesting its capital, the returns that it's generating haven't increased. Unsurprisingly then, the total return to shareholders over the last five years has been flat. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you want to know some of the risks facing Anhui Fuhuang Steel Structure we've found 3 warning signs (2 can't be ignored!) that you should be aware of before investing here.

While Anhui Fuhuang Steel Structure 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.