Huili Resources (Group) (HKG:1303) Knows How To Allocate Capital Effectively

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. With that in mind, the ROCE of Huili Resources (Group) (HKG:1303) looks great, so lets see what the trend can tell us.

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 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).

So, Huili Resources (Group) has an ROCE of 39%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 8.7%.

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?

The fact that Huili Resources (Group) is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 39% on its capital. Not only that, but the company is utilizing 35% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 52% of its operations, which isn't ideal. 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.

The Bottom Line On Huili Resources (Group)'s ROCE

Long story short, we're delighted to see that Huili Resources (Group)'s reinvestment activities have paid off and the company is now profitable. Given the stock has declined 13% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you'd like to know about the risks facing Huili Resources (Group), we've discovered 2 warning signs that you should be aware of.

Huili Resources (Group) is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.