Can Renrui Human Resources Technology Holdings (HKG:6919) Continue To Grow Its Returns On Capital?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. So on that note, Renrui Human Resources Technology Holdings (HKG:6919) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Renrui Human Resources Technology Holdings is:

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

0.081 = CN¥100m ÷ (CN¥1.6b - CN¥334m) (Based on the trailing twelve months to June 2020).

Thus, Renrui Human Resources Technology Holdings has an ROCE of 8.1%. Ultimately, that's a low return and it under-performs the Professional Services industry average of 13%.

See our latest analysis for Renrui Human Resources Technology Holdings

Above you can see how the current ROCE for Renrui Human Resources Technology Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Renrui Human Resources Technology Holdings.

The Trend Of ROCE

Renrui Human Resources Technology Holdings has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making three years ago but is is now generating 8.1% on its capital. And unsurprisingly, like most companies trying to break into the black, Renrui Human Resources Technology Holdings is utilizing 3,139% more capital than it was three years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 21%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Renrui Human Resources Technology Holdings has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

In Conclusion...

Long story short, we're delighted to see that Renrui Human Resources Technology Holdings' reinvestment activities have paid off and the company is now profitable. And since the stock has fallen 27% over the last year, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

On a final note, we've found 1 warning sign for Renrui Human Resources Technology Holdings that we think you should be aware of.

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