If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Anhui Xinbo Aluminum (SZSE:003038), it didn't seem to tick all of these boxes.

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. 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¥187m ÷ (CN¥3.8b - CN¥1.9b) (Based on the trailing twelve months to June 2022).

So, Anhui Xinbo Aluminum has an ROCE of 9.9%. On its own, that's a low figure but it's around the 8.3% average generated by the Metals and Mining industry.

See our latest analysis for Anhui Xinbo Aluminum

Above you can see how the current ROCE for Anhui Xinbo Aluminum compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Anhui Xinbo Aluminum here for free.

So How Is Anhui Xinbo Aluminum's ROCE Trending?

Unfortunately, the trend isn't great with ROCE falling from 20% four years ago, while capital employed has grown 1,049%. 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. Anhui Xinbo Aluminum probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

On a separate but related note, it's important to know that Anhui Xinbo Aluminum has a current liabilities to total assets ratio of 50%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

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. And the stock has followed suit returning a meaningful 35% to shareholders over the last year. So should these growth trends continue, we'd be optimistic on the stock going forward.

One more thing: We've identified 4 warning signs with Anhui Xinbo Aluminum (at least 2 which shouldn't be ignored) , and understanding them would certainly be useful.

While Anhui Xinbo Aluminum may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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