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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Anhui Anfu Battery TechnologyLtd (SHSE:603031) and its trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Anhui Anfu Battery TechnologyLtd:

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

0.19 = CN¥898m ÷ (CN¥6.7b - CN¥1.9b) (Based on the trailing twelve months to December 2023).

So, Anhui Anfu Battery TechnologyLtd has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Electrical industry average of 6.6% it's much better.

In the above chart we have measured Anhui Anfu Battery TechnologyLtd's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Anhui Anfu Battery TechnologyLtd .

How Are Returns Trending?

Investors would be pleased with what's happening at Anhui Anfu Battery TechnologyLtd. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 19%. Basically the business is earning more per dollar of capital invested and in addition to that, 679% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

One more thing to note, Anhui Anfu Battery TechnologyLtd has decreased current liabilities to 29% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

What We Can Learn From Anhui Anfu Battery TechnologyLtd's ROCE

In summary, it's great to see that Anhui Anfu Battery TechnologyLtd can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And a remarkable 258% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Anhui Anfu Battery TechnologyLtd can keep these trends up, it could have a bright future ahead.

Anhui Anfu Battery TechnologyLtd does have some risks though, and we've spotted 2 warning signs for Anhui Anfu Battery TechnologyLtd that you might be interested in.

While Anhui Anfu Battery TechnologyLtd 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.

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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.