What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Anhui Huaertai Chemical (SZSE:001217) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Anhui Huaertai Chemical:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.055 = CN¥119m ÷ (CN¥2.9b - CN¥726m) (Based on the trailing twelve months to June 2023).
So, Anhui Huaertai Chemical has an ROCE of 5.5%. In absolute terms, that's a low return but it's around the Chemicals industry average of 5.5%.
Check out our latest analysis for Anhui Huaertai Chemical
Historical performance is a great place to start when researching a stock so above you can see the gauge for Anhui Huaertai Chemical's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Anhui Huaertai Chemical, check out these free graphs here.
The Trend Of ROCE
When we looked at the ROCE trend at Anhui Huaertai Chemical, we didn't gain much confidence. Around five years ago the returns on capital were 23%, but since then they've fallen to 5.5%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
On a related note, Anhui Huaertai Chemical has decreased its current liabilities to 25% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
What We Can Learn From Anhui Huaertai Chemical's ROCE
In summary, we're somewhat concerned by Anhui Huaertai Chemical's diminishing returns on increasing amounts of capital. And long term shareholders have watched their investments stay flat over the last year. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
On a final note, we found 3 warning signs for Anhui Huaertai Chemical (1 is a bit concerning) you should be aware of.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.