Anhui Conch Cement's (HKG:914) Returns On Capital Not Reflecting Well On The Business

Simply Wall St ·  Apr 13 20:33

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. In light of that, when we looked at Anhui Conch Cement (HKG:914) and its ROCE trend, we weren't exactly thrilled.

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. To calculate this metric for Anhui Conch Cement, this is the formula:

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

0.055 = CN¥12b ÷ (CN¥246b - CN¥30b) (Based on the trailing twelve months to December 2023).

Therefore, Anhui Conch Cement has an ROCE of 5.5%. On its own that's a low return, but compared to the average of 4.0% generated by the Basic Materials industry, it's much better.

SEHK:914 Return on Capital Employed April 14th 2024

In the above chart we have measured Anhui Conch Cement's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Anhui Conch Cement .

What The Trend Of ROCE Can Tell Us

In terms of Anhui Conch Cement's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 32%, but since then they've fallen to 5.5%. 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 may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Anhui Conch Cement's ROCE

To conclude, we've found that Anhui Conch Cement is reinvesting in the business, but returns have been falling. Since the stock has declined 54% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

One more thing, we've spotted 2 warning signs facing Anhui Conch Cement that you might find interesting.

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.

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