We Like These Underlying Return On Capital Trends At Shougang Fushan Resources Group (HKG:639)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. So when we looked at Shougang Fushan Resources Group (HKG:639) and its trend of ROCE, we really liked what we saw.

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. To calculate this metric for Shougang Fushan Resources Group, this is the formula:

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

0.083 = HK$1.6b ÷ (HK$23b - HK$3.1b) (Based on the trailing twelve months to June 2021).

Therefore, Shougang Fushan Resources Group has an ROCE of 8.3%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 13%.

View our latest analysis for Shougang Fushan Resources Group

In the above chart we have measured Shougang Fushan Resources Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Shougang Fushan Resources Group here for free.

What The Trend Of ROCE Can Tell Us

Shougang Fushan Resources Group has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 8.3% on its capital, because five years ago it was incurring losses. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

The Key Takeaway

In summary, we're delighted to see that Shougang Fushan Resources Group has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Shougang Fushan Resources Group does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...

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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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.