Huili Resources (Group) (HKG:1303) Is Very Good At Capital Allocation

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Speaking of which, we noticed some great changes in Huili Resources (Group)'s (HKG:1303) returns on capital, so let's have a look.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Huili Resources (Group) is:

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

0.39 = CN¥272m ÷ (CN¥1.4b - CN¥742m) (Based on the trailing twelve months to June 2023).

Therefore, Huili Resources (Group) has an ROCE of 39%. That's a fantastic return and not only that, it outpaces the average of 8.4% earned by companies in a similar industry.

View our latest analysis for Huili Resources (Group)

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

What Does the ROCE Trend For Huili Resources (Group) Tell Us?

Huili Resources (Group) 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 five years ago but is is now generating 39% on its capital. In addition to that, Huili Resources (Group) is employing 35% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 52% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

Our Take On Huili Resources (Group)'s ROCE

Overall, Huili Resources (Group) gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And with a respectable 25% awarded to those who held the stock over the last three years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Huili Resources (Group) can keep these trends up, it could have a bright future ahead.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Huili Resources (Group) (of which 1 can't be ignored!) that you should know about.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.