Returns At HyUnion HoldingLtd (SZSE:002537) Are On The Way Up

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, HyUnion HoldingLtd (SZSE:002537) looks quite promising in regards to its trends of return on capital.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for HyUnion HoldingLtd, this is the formula:

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

0.067 = CN¥313m ÷ (CN¥8.7b - CN¥4.0b) (Based on the trailing twelve months to September 2024).

Therefore, HyUnion HoldingLtd has an ROCE of 6.7%. On its own that's a low return on capital but it's in line with the industry's average returns of 7.0%.

See our latest analysis for HyUnion HoldingLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for HyUnion HoldingLtd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of HyUnion HoldingLtd.

How Are Returns Trending?

We're pretty happy with how the ROCE has been trending at HyUnion HoldingLtd. The figures show that over the last five years, returns on capital have grown by 227%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Speaking of capital employed, the company is actually utilizing 28% less than it was five years ago, which can be indicative of a business that's improving its efficiency. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

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. The current liabilities has increased to 46% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.

Our Take On HyUnion HoldingLtd's ROCE

In summary, it's great to see that HyUnion HoldingLtd has been able to turn things around and earn higher returns on lower amounts of capital. Astute investors may have an opportunity here because the stock has declined 10% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

HyUnion HoldingLtd does have some risks though, and we've spotted 2 warning signs for HyUnion HoldingLtd that you might be interested in.

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.