There's Been No Shortage Of Growth Recently For Newton Resources' (HKG:1231) 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. 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. To calculate this metric for Newton Resources, this is the formula:

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

0.029 = US$888k ÷ (US$70m - US$39m) (Based on the trailing twelve months to June 2023).

So, Newton Resources has an ROCE of 2.9%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 6.3%.

View 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 want to delve into the historical earnings, revenue and cash flow of Newton Resources, check out these free graphs here.

The Trend Of ROCE

Like most people, we're pleased that Newton Resources is now generating some pretax earnings. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 2.9% on their capital employed. In regards to capital employed, Newton Resources is using 32% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. This could potentially mean that the company is selling some of its assets.

On a side note, Newton Resources' current liabilities are still rather high at 56% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

In a nutshell, we're pleased to see that Newton Resources has been able to generate higher returns from less capital. Given the stock has declined 28% 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 to note, we've identified 1 warning sign with Newton Resources and understanding it should be part of your investment process.

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.