What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. In light of that, when we looked at Anhui Truchum Advanced Materials and Technology (SZSE:002171) and its ROCE trend, we weren't exactly thrilled.

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 Anhui Truchum Advanced Materials and Technology is:

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).

So, Anhui Truchum Advanced Materials and Technology has an ROCE of 7.0%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 9.8%.

See our latest analysis for Anhui Truchum Advanced Materials and Technology

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Anhui Truchum Advanced Materials and Technology, check out these free graphs here.

So How Is Anhui Truchum Advanced Materials and Technology's ROCE Trending?

On the surface, the trend of ROCE at Anhui Truchum Advanced Materials and Technology doesn't inspire confidence. Over the last five years, returns on capital have decreased to 7.0% from 9.1% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 38%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 7.0%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

In Conclusion...

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 40% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

Anhui Truchum Advanced Materials and Technology does have some risks, we noticed 3 warning signs (and 1 which is a bit concerning) we think you should know about.

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.

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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.