Renrui Human Resources Technology Holdings (HKG:6919) Could Be Struggling To Allocate Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Renrui Human Resources Technology Holdings (HKG:6919), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Renrui Human Resources Technology Holdings:

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

0.062 = CN¥96m ÷ (CN¥2.5b - CN¥930m) (Based on the trailing twelve months to June 2024).

Thus, Renrui Human Resources Technology Holdings has an ROCE of 6.2%. In absolute terms, that's a low return and it also under-performs the Professional Services industry average of 9.4%.

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, you can check out the forecasts from the analysts covering Renrui Human Resources Technology Holdings for free.

What The Trend Of ROCE Can Tell Us

In terms of Renrui Human Resources Technology Holdings' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 45% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Renrui Human Resources Technology Holdings has done well to pay down its current liabilities to 38% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Renrui Human Resources Technology Holdings' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Renrui Human Resources Technology Holdings is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 53% over the last three years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

On a separate note, we've found 1 warning sign for Renrui Human Resources Technology Holdings you'll probably want to know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.