If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Anhui Wanwei Updated High-Tech Material IndustryLtd (SHSE:600063) 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 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. Analysts use this formula to calculate it for Anhui Wanwei Updated High-Tech Material IndustryLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.032 = CN¥282m ÷ (CN¥15b - CN¥6.0b) (Based on the trailing twelve months to September 2023).
So, Anhui Wanwei Updated High-Tech Material IndustryLtd has an ROCE of 3.2%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 5.6%.
In the above chart we have measured Anhui Wanwei Updated High-Tech Material IndustryLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Anhui Wanwei Updated High-Tech Material IndustryLtd here for free.
What Can We Tell From Anhui Wanwei Updated High-Tech Material IndustryLtd's ROCE Trend?
When we looked at the ROCE trend at Anhui Wanwei Updated High-Tech Material IndustryLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 3.2% from 4.3% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
On a separate but related note, it's important to know that Anhui Wanwei Updated High-Tech Material IndustryLtd has a current liabilities to total assets ratio of 41%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
The Bottom Line On Anhui Wanwei Updated High-Tech Material IndustryLtd's ROCE
To conclude, we've found that Anhui Wanwei Updated High-Tech Material IndustryLtd is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 34% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
Like most companies, Anhui Wanwei Updated High-Tech Material IndustryLtd does come with some risks, and we've found 3 warning signs that you should be aware of.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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.