Shougang Fushan Resources Group (HKG:639) Is Looking To Continue Growing Its Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Shougang Fushan Resources Group's (HKG:639) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

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 Shougang Fushan Resources Group is:

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

0.073 = HK$1.4b ÷ (HK$21b - HK$2.5b) (Based on the trailing twelve months to December 2020).

Therefore, Shougang Fushan Resources Group has an ROCE of 7.3%. In absolute terms, that's a low return but it's around the Metals and Mining industry average of 8.0%.

See our latest analysis for Shougang Fushan Resources Group

Above you can see how the current ROCE for Shougang Fushan Resources Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Shougang Fushan Resources Group here for free.

What Does the ROCE Trend For Shougang Fushan Resources Group Tell Us?

Shareholders will be relieved that Shougang Fushan Resources Group has broken into profitability. The company now earns 7.3% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Shougang Fushan Resources Group has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

The Key Takeaway

As discussed above, Shougang Fushan Resources Group appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Since the stock has returned a staggering 181% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Shougang Fushan Resources Group does have some risks though, and we've spotted 1 warning sign for Shougang Fushan Resources Group that you might be interested in.

While Shougang Fushan Resources Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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