China Ruyi Holdings (HKG:136) May Have Issues Allocating Its Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating China Ruyi Holdings (HKG:136), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for China Ruyi Holdings, this is the formula:

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

0.06 = CN¥796m ÷ (CN¥17b - CN¥3.4b) (Based on the trailing twelve months to December 2023).

Thus, China Ruyi Holdings has an ROCE of 6.0%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.2%.

View our latest analysis for China Ruyi Holdings

Above you can see how the current ROCE for China Ruyi Holdings 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 China Ruyi Holdings for free.

How Are Returns Trending?

On the surface, the trend of ROCE at China Ruyi Holdings doesn't inspire confidence. Around five years ago the returns on capital were 13%, but since then they've fallen to 6.0%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From China Ruyi Holdings' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that China Ruyi Holdings is reinvesting for growth and has higher sales as a result.

One more thing, we've spotted 3 warning signs facing China Ruyi Holdings that you might find interesting.

While China Ruyi Holdings 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.