The Returns At An Hui Wenergy (SZSE:000543) Aren't Growing

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Although, when we looked at An Hui Wenergy (SZSE:000543), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed 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)

0.037 = CN¥1.8b ÷ (CN¥62b - CN¥14b) (Based on the trailing twelve months to March 2024).

Therefore, An Hui Wenergy has an ROCE of 3.7%. Ultimately, that's a low return and it under-performs the Renewable Energy industry average of 5.9%.

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'd like to see what analysts are forecasting going forward, you should check out our free analyst report for An Hui Wenergy .

What Does the ROCE Trend For An Hui Wenergy Tell Us?

There are better returns on capital out there than what we're seeing at An Hui Wenergy. The company has employed 113% more capital in the last five years, and the returns on that capital have remained stable at 3.7%. 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.

In Conclusion...

In conclusion, An Hui Wenergy has been investing more capital into the business, but returns on that capital haven't increased. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 121% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

On a final note, we found 2 warning signs for An Hui Wenergy (1 is a bit concerning) you should be aware of.

While An Hui Wenergy 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com