Returns On Capital At An Hui Wenergy (SZSE:000543) Have Hit The Brakes

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at An Hui Wenergy (SZSE:000543) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. The formula for this calculation on An Hui Wenergy is:

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

0.047 = CN¥2.2b ÷ (CN¥64b - CN¥16b) (Based on the trailing twelve months to June 2024).

Thus, An Hui Wenergy has an ROCE of 4.7%. On its own, that's a low figure but it's around the 5.6% average generated by the Renewable Energy industry.

View our latest analysis for An Hui Wenergy

Above you can see how the current ROCE for An Hui Wenergy compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for An Hui Wenergy .

How Are Returns Trending?

In terms of An Hui Wenergy's historical ROCE trend, it doesn't exactly demand attention. The company has employed 118% more capital in the last five years, and the returns on that capital have remained stable at 4.7%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Bottom Line

Long story short, while An Hui Wenergy has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has gained an impressive 84% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

An Hui Wenergy does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit 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.