Anhui Sentai WPC Group Share (SZSE:301429) May Have Issues Allocating Its Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Anhui Sentai WPC Group Share (SZSE:301429) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for Anhui Sentai WPC Group Share:

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

0.02 = CN¥26m ÷ (CN¥1.5b - CN¥115m) (Based on the trailing twelve months to September 2023).

So, Anhui Sentai WPC Group Share has an ROCE of 2.0%. Ultimately, that's a low return and it under-performs the Forestry industry average of 4.5%.

Check out our latest analysis for Anhui Sentai WPC Group Share

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Anhui Sentai WPC Group Share's past further, check out this free graph covering Anhui Sentai WPC Group Share's past earnings, revenue and cash flow.

So How Is Anhui Sentai WPC Group Share's ROCE Trending?

On the surface, the trend of ROCE at Anhui Sentai WPC Group Share doesn't inspire confidence. Around five years ago the returns on capital were 9.0%, but since then they've fallen to 2.0%. 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.

On a related note, Anhui Sentai WPC Group Share has decreased its current liabilities to 7.9% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Anhui Sentai WPC Group Share's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Anhui Sentai WPC Group Share have fallen, meanwhile the business is employing more capital than it was five years ago. Investors haven't taken kindly to these developments, since the stock has declined 60% from where it was year ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a separate note, we've found 2 warning signs for Anhui Sentai WPC Group Share you'll probably want to know about.

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.