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

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Although, when we looked at Anhui Xinbo Aluminum (SZSE:003038), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Anhui Xinbo Aluminum:

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

0.07 = CN¥272m ÷ (CN¥9.9b - CN¥6.0b) (Based on the trailing twelve months to September 2024).

So, Anhui Xinbo Aluminum has an ROCE of 7.0%. Even though it's in line with the industry average of 6.8%, it's still a low return by itself.

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'd like, you can check out the forecasts from the analysts covering Anhui Xinbo Aluminum for free.

How Are Returns Trending?

The trend of ROCE doesn't look fantastic because it's fallen from 22% five years ago, while the business's capital employed increased by 1,150%. Usually this isn't ideal, but given Anhui Xinbo Aluminum conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Anhui Xinbo Aluminum might not have received a full period of earnings contribution from it.

On a side note, Anhui Xinbo Aluminum's current liabilities have increased over the last five years to 61% 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.

What We Can Learn From 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 52% 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.

One more thing: We've identified 5 warning signs with Anhui Xinbo Aluminum (at least 2 which are significant) , and understanding them would certainly be useful.

While Anhui Xinbo Aluminum 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.