What trends should we look for it we want to identify stocks that can 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Anfu CE LINK (SZSE:300787), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What Is It?
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. The formula for this calculation on Anfu CE LINK is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.052 = CN¥117m ÷ (CN¥3.1b - CN¥865m) (Based on the trailing twelve months to September 2023).
So, Anfu CE LINK has an ROCE of 5.2%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.1%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Anfu CE LINK's ROCE against it's prior returns. If you'd like to look at how Anfu CE LINK has performed in the past in other metrics, you can view this free graph of Anfu CE LINK's past earnings, revenue and cash flow.
The Trend Of ROCE
On the surface, the trend of ROCE at Anfu CE LINK doesn't inspire confidence. Over the last five years, returns on capital have decreased to 5.2% from 23% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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.
What We Can Learn From Anfu CE LINK's ROCE
In summary, we're somewhat concerned by Anfu CE LINK's diminishing returns on increasing amounts of capital. Long term shareholders who've owned the stock over the last three years have experienced a 27% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
Anfu CE LINK does have some risks though, and we've spotted 3 warning signs for Anfu CE LINK that you might be interested in.
While Anfu CE LINK 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.