There are a few key trends to look for if we want to identify the next multi-bagger. 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. However, after investigating Anhui Truchum Advanced Materials and Technology (SZSE:002171), we don't think it's current trends fit the mold of a multi-bagger.

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 Truchum Advanced Materials and Technology:

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

0.07 = CN¥619m ÷ (CN¥14b - CN¥5.3b) (Based on the trailing twelve months to March 2022).

Thus, Anhui Truchum Advanced Materials and Technology has an ROCE of 7.0%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 9.5%.

View our latest analysis for Anhui Truchum Advanced Materials and Technology

Above you can see how the current ROCE for Anhui Truchum Advanced Materials and Technology 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 report for Anhui Truchum Advanced Materials and Technology.

What Does the ROCE Trend For Anhui Truchum Advanced Materials and Technology Tell Us?

On the surface, the trend of ROCE at Anhui Truchum Advanced Materials and Technology doesn't inspire confidence. To be more specific, ROCE has fallen from 9.1% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Anhui Truchum Advanced Materials and Technology's current liabilities have increased over the last five years to 38% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 7.0%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

What We Can Learn From Anhui Truchum Advanced Materials and Technology's ROCE

While returns have fallen for Anhui Truchum Advanced Materials and Technology in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. In light of this, the stock has only gained 12% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

Anhui Truchum Advanced Materials and Technology does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those is significant...

While Anhui Truchum Advanced Materials and Technology 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.