Reliance Global Holdings (HKG:723) Is Looking To Continue Growing Its Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Reliance Global Holdings (HKG:723) looks quite promising in regards to its trends of return on capital.

What is 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 Reliance Global Holdings is:

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

0.18 = HK$50m ÷ (HK$557m - HK$284m) (Based on the trailing twelve months to September 2020).

So, Reliance Global Holdings has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 7.5% generated by the Forestry industry.

Check out our latest analysis for Reliance Global Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Reliance Global Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Reliance Global Holdings, check out these free graphs here.

So How Is Reliance Global Holdings' ROCE Trending?

Shareholders will be relieved that Reliance Global Holdings has broken into profitability. The company now earns 18% 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. Because in the end, a business can only get so efficient.

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. Effectively this means that suppliers or short-term creditors are now funding 51% of the business, which is more than it was five years ago. 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.

What We Can Learn From Reliance Global Holdings' ROCE

In summary, we're delighted to see that Reliance Global Holdings has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And since the stock has dived 79% over the last five years, there may be other factors affecting the company's prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

One final note, you should learn about the 2 warning signs we've spotted with Reliance Global Holdings (including 1 which shouldn't be ignored) .

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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