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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Huili Resources (Group) (HKG:1303) looks great, so lets see what the trend can tell us.
What Is 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 Huili Resources (Group):
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.23 = CN¥195m ÷ (CN¥1.6b - CN¥742m) (Based on the trailing twelve months to December 2023).
Thus, Huili Resources (Group) has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 11%.
View our latest analysis for Huili Resources (Group)
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're interested in investigating Huili Resources (Group)'s past further, check out this free graph covering Huili Resources (Group)'s past earnings, revenue and cash flow.
So How Is Huili Resources (Group)'s ROCE Trending?
We're delighted to see that Huili Resources (Group) is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 23% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Huili Resources (Group) is utilizing 80% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 47% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.
The Bottom Line
In summary, it's great to see that Huili Resources (Group) has managed to break into profitability and is continuing to reinvest in its business. Considering the stock has delivered 31% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.
One more thing: We've identified 4 warning signs with Huili Resources (Group) (at least 2 which are a bit unpleasant) , and understanding them would certainly be useful.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high 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.
