Newton Resources (HKG:1231) Is Experiencing Growth In Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Newton Resources (HKG:1231) so let's look a bit deeper.

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 Newton Resources is:

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

0.10 = US$3.2m ÷ (US$109m - US$79m) (Based on the trailing twelve months to December 2023).

So, Newton Resources has an ROCE of 10%. In absolute terms, that's a satisfactory return, but compared to the Trade Distributors industry average of 6.6% it's much better.

See our latest analysis for Newton Resources

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

So How Is Newton Resources' ROCE Trending?

Like most people, we're pleased that Newton Resources is now generating some pretax earnings. The company was generating losses five years ago, but now it's turned around, earning 10% which is no doubt a relief for some early shareholders. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 26%. Newton Resources could be selling under-performing assets since the ROCE is improving.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 72% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Key Takeaway

In a nutshell, we're pleased to see that Newton Resources has been able to generate higher returns from less capital. Astute investors may have an opportunity here because the stock has declined 64% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you'd like to know about the risks facing Newton Resources, we've discovered 1 warning sign that you should be aware of.

While Newton Resources may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.