Returns At China Risun Group (HKG:1907) Are On The Way Up

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. Speaking of which, we noticed some great changes in China Risun Group's (HKG:1907) returns on capital, so let's have a look.

What Is 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. To calculate this metric for China Risun Group, this is the formula:

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

0.17 = CN¥3.6b ÷ (CN¥42b - CN¥21b) (Based on the trailing twelve months to June 2022).

Thus, China Risun Group has an ROCE of 17%. That's a relatively normal return on capital, and it's around the 15% generated by the Chemicals industry.

See our latest analysis for China Risun Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for China Risun Group's ROCE against it's prior returns. If you're interested in investigating China Risun Group's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From China Risun Group's ROCE Trend?

China Risun Group is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 17%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 272%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a related note, the company's ratio of current liabilities to total assets has decreased to 50%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

Our Take On China Risun Group's ROCE

In summary, it's great to see that China Risun Group can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 80% return over the last three years. In light of that, we think it's worth looking further into this stock because if China Risun Group can keep these trends up, it could have a bright future ahead.

If you want to know some of the risks facing China Risun Group we've found 3 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.

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.