Returns On Capital Signal Tricky Times Ahead For Anhui Xinbo Aluminum (SZSE:003038)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Anhui Xinbo Aluminum (SZSE:003038), it didn't seem to tick all of these boxes.

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. To calculate this metric for Anhui Xinbo Aluminum, this is the formula:

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

0.099 = CN¥386m ÷ (CN¥9.8b - CN¥5.9b) (Based on the trailing twelve months to June 2024).

So, Anhui Xinbo Aluminum has an ROCE of 9.9%. On its own that's a low return, but compared to the average of 7.0% generated by the Metals and Mining industry, it's much better.

View our latest analysis for Anhui Xinbo Aluminum

In the above chart we have measured Anhui Xinbo Aluminum's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Anhui Xinbo Aluminum .

So How Is Anhui Xinbo Aluminum's ROCE Trending?

We weren't thrilled with the trend because Anhui Xinbo Aluminum's ROCE has reduced by 48% over the last five years, while the business employed 1,280% more capital. That being said, Anhui Xinbo Aluminum raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Anhui Xinbo Aluminum's earnings and if they change as a result from the capital raise.

On a side note, Anhui Xinbo Aluminum's current liabilities have increased over the last five years to 60% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

Our Take On Anhui Xinbo Aluminum's ROCE

While returns have fallen for Anhui Xinbo Aluminum in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, despite the promising trends, the stock has fallen 46% over the last three years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Anhui Xinbo Aluminum does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those are concerning...

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.