Investors Will Want China Metal Resources Utilization's (HKG:1636) Growth In ROCE To Persist

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, China Metal Resources Utilization (HKG:1636) looks quite promising in regards to its trends of return on capital.

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. The formula for this calculation on China Metal Resources Utilization is:

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

0.055 = CN¥93m ÷ (CN¥6.1b - CN¥4.4b) (Based on the trailing twelve months to June 2021).

Thus, China Metal Resources Utilization has an ROCE of 5.5%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 13%.

Check out our latest analysis for China Metal Resources Utilization

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of China Metal Resources Utilization, check out these free graphs here.

So How Is China Metal Resources Utilization's ROCE Trending?

The fact that China Metal Resources Utilization is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 5.5% on its capital. In addition to that, China Metal Resources Utilization is employing 128% 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.

Another thing to note, China Metal Resources Utilization has a high ratio of current liabilities to total assets of 72%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

To the delight of most shareholders, China Metal Resources Utilization has now broken into profitability. And since the stock has dived 94% over the last five years, there may be other factors affecting the company's prospects. Still, it's worth doing some further research to see if the trends will continue into the future.

China Metal Resources Utilization does have some risks, we noticed 4 warning signs (and 2 which can't be ignored) we think you should know about.

While China Metal Resources Utilization isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.