Returns On Capital Are Showing Encouraging Signs At Huasu HoldingsLtd (SZSE:000509)

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. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Huasu HoldingsLtd (SZSE:000509) so let's look a bit deeper.

Understanding 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 Huasu HoldingsLtd, this is the formula:

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

0.012 = CN¥2.7m ÷ (CN¥809m - CN¥580m) (Based on the trailing twelve months to June 2024).

Thus, Huasu HoldingsLtd has an ROCE of 1.2%. In absolute terms, that's a low return and it also under-performs the Building industry average of 7.7%.

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're interested in investigating Huasu HoldingsLtd's past further, check out this free graph covering Huasu HoldingsLtd's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

The fact that Huasu HoldingsLtd is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 1.2% on its capital. And unsurprisingly, like most companies trying to break into the black, Huasu HoldingsLtd is utilizing 2,724% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

One more thing to note, Huasu HoldingsLtd has decreased current liabilities to 72% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Huasu HoldingsLtd has grown its returns without a reliance on increasing their current liabilities, which we're very happy with. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

Our Take On Huasu HoldingsLtd's ROCE

To the delight of most shareholders, Huasu HoldingsLtd has now broken into profitability. Considering the stock has delivered 19% 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 with that in mind, we think the stock deserves further research.

If you want to continue researching Huasu HoldingsLtd, you might be interested to know about the 1 warning sign that our analysis has discovered.

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.