Investors Shouldn't Overlook Henan Yuguang Gold&LeadLtd's (SHSE:600531) Impressive Returns On Capital

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. And in light of that, the trends we're seeing at Henan Yuguang Gold&LeadLtd's (SHSE:600531) look very promising so lets take a look.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Henan Yuguang Gold&LeadLtd is:

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

0.25 = CN¥1.9b ÷ (CN¥17b - CN¥9.9b) (Based on the trailing twelve months to September 2024).

Thus, Henan Yuguang Gold&LeadLtd has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 6.8%.

See our latest analysis for Henan Yuguang Gold&LeadLtd

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Henan Yuguang Gold&LeadLtd.

How Are Returns Trending?

Henan Yuguang Gold&LeadLtd is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 25%. Basically the business is earning more per dollar of capital invested and in addition to that, 83% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

On a side note, Henan Yuguang Gold&LeadLtd's current liabilities are still rather high at 57% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Henan Yuguang Gold&LeadLtd's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Henan Yuguang Gold&LeadLtd has. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 82% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.

Henan Yuguang Gold&LeadLtd does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is significant...

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.