The Return Trends At RENHENG Enterprise Holdings (HKG:3628) Look Promising

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. So when we looked at RENHENG Enterprise Holdings (HKG:3628) and its trend of ROCE, we really liked what we saw.

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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. Analysts use this formula to calculate it for RENHENG Enterprise Holdings:

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

0.059 = HK$7.6m ÷ (HK$245m - HK$116m) (Based on the trailing twelve months to December 2024).

Thus, RENHENG Enterprise Holdings has an ROCE of 5.9%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 7.7%.

Check out our latest analysis for RENHENG Enterprise Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for RENHENG Enterprise Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of RENHENG Enterprise Holdings.

How Are Returns Trending?

RENHENG Enterprise Holdings has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 5.9%, which is always encouraging. While returns have increased, the amount of capital employed by RENHENG Enterprise Holdings has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. Because in the end, a business can only get so efficient.

On a side note, RENHENG Enterprise Holdings' current liabilities are still rather high at 47% 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From RENHENG Enterprise Holdings' ROCE

To sum it up, RENHENG Enterprise Holdings is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has only returned 24% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

One more thing to note, we've identified 3 warning signs with RENHENG Enterprise Holdings and understanding them should be part of your investment process.

While RENHENG Enterprise Holdings isn't earning the highest return, check out this free list of companies that are 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.