Huasu HoldingsLtd (SZSE:000509) Shareholders Will Want The ROCE Trajectory To Continue

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Huasu HoldingsLtd's (SZSE:000509) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Huasu HoldingsLtd, this is the formula:

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

0.0011 = CN¥286k ÷ (CN¥700m - CN¥446m) (Based on the trailing twelve months to September 2023).

Thus, Huasu HoldingsLtd has an ROCE of 0.1%. In absolute terms, that's a low return and it also under-performs the Building industry average of 6.9%.

Check out our latest analysis for Huasu HoldingsLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Huasu HoldingsLtd's ROCE against it's prior returns. If you'd like to look at how Huasu HoldingsLtd has performed in the past in other metrics, you can view this free graph of Huasu HoldingsLtd's past earnings, revenue and cash flow.

The Trend Of ROCE

We're delighted to see that Huasu HoldingsLtd is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 0.1% on its capital. In addition to that, Huasu HoldingsLtd is employing 326% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 64%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business' underlying economics, which is great to see. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.

The Key Takeaway

Long story short, we're delighted to see that Huasu HoldingsLtd's reinvestment activities have paid off and the company is now profitable. Given the stock has declined 23% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One more thing, we've spotted 1 warning sign facing Huasu HoldingsLtd that you might find interesting.

While Huasu HoldingsLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.