The Return Trends At Huasi Holding (SZSE:002494) Look Promising

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. So on that note, Huasi Holding (SZSE:002494) looks quite promising in regards to its trends of return on capital.

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. The formula for this calculation on Huasi Holding is:

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

0.0071 = CN¥8.7m ÷ (CN¥1.7b - CN¥444m) (Based on the trailing twelve months to December 2023).

Therefore, Huasi Holding has an ROCE of 0.7%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 5.8%.

View our latest analysis for Huasi Holding

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

What Can We Tell From Huasi Holding's ROCE Trend?

It's nice to see that ROCE is headed in the right direction, even if it is still relatively low. The data shows that returns on capital have increased by 529% over the trailing five years. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Interestingly, the business may be becoming more efficient because it's applying 40% less capital than it was five years ago. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

The Bottom Line On Huasi Holding's ROCE

In a nutshell, we're pleased to see that Huasi Holding has been able to generate higher returns from less capital. And since the stock has fallen 44% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

Huasi Holding does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.