Renrui Human Resources Technology Holdings (HKG:6919) Might Be Having Difficulty Using Its Capital Effectively

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Renrui Human Resources Technology Holdings (HKG:6919), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for Renrui Human Resources Technology Holdings, this is the formula:

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

0.023 = CN¥34m ÷ (CN¥2.1b - CN¥641m) (Based on the trailing twelve months to December 2022).

So, Renrui Human Resources Technology Holdings has an ROCE of 2.3%. Ultimately, that's a low return and it under-performs the Professional Services industry average of 13%.

View 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.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Renrui Human Resources Technology Holdings, we didn't gain much confidence. To be more specific, ROCE has fallen from 32% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, Renrui Human Resources Technology Holdings has done well to pay down its current liabilities to 30% of total assets. Since the ratio used to be 81%, that's a significant reduction and it no doubt explains the drop 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

From the above analysis, we find it rather worrisome that returns on capital and sales for Renrui Human Resources Technology Holdings have fallen, meanwhile the business is employing more capital than it was five years ago. Unsurprisingly then, the stock has dived 83% over the last three years, so investors are recognizing these changes and don't like the company's prospects. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing, we've spotted 1 warning sign facing Renrui Human Resources Technology Holdings that you might find interesting.

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.