Returns On Capital Are Showing Encouraging Signs At RLX Technology (NYSE:RLX)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at RLX Technology (NYSE:RLX) and its trend of ROCE, we really liked what we saw.

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 RLX Technology, this is the formula:

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

0.13 = CN¥2.1b ÷ (CN¥17b - CN¥1.4b) (Based on the trailing twelve months to September 2022).

Therefore, RLX Technology has an ROCE of 13%. In isolation, that's a pretty standard return but against the Tobacco industry average of 19%, it's not as good.

View our latest analysis for RLX Technology

Above you can see how the current ROCE for RLX Technology 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 RLX Technology here for free.

What The Trend Of ROCE Can Tell Us

Investors would be pleased with what's happening at RLX Technology. The data shows that returns on capital have increased substantially over the last three years to 13%. 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 2,417%. So we're very much inspired by what we're seeing at RLX Technology thanks to its ability to profitably reinvest capital.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 8.1%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that RLX Technology has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Bottom Line

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what RLX Technology has. And since the stock has fallen 38% over the last year, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

One more thing: We've identified 4 warning signs with RLX Technology (at least 2 which don't sit too well with us) , and understanding them would certainly be useful.

While RLX Technology isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.