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We Like These Underlying Return On Capital Trends At China Risun Group (HKG:1907)

Simply Wall St ·  {{timeTz}}

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. With that in mind, we've noticed some promising trends at China Risun Group (HKG:1907) so let's look a bit deeper.

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 China Risun Group is:

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

0.19 = CN¥3.7b ÷ (CN¥37b - CN¥17b) (Based on the trailing twelve months to December 2021).

Thus, China Risun Group has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 12% it's much better.

See our latest analysis for China Risun Group

roceSEHK:1907 Return on Capital Employed August 15th 2022

Historical performance is a great place to start when researching a stock so above you can see the gauge for China Risun Group's ROCE against it's prior returns. If you're interested in investigating China Risun Group's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

The trends we've noticed at China Risun Group are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 19%. The amount of capital employed has increased too, by 277%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 46%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

What We Can Learn From China Risun Group's ROCE

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 China Risun Group has. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 29% return over the last three years. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you want to continue researching China Risun Group, you might be interested to know about the 2 warning signs that our analysis has discovered.

While China Risun 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.

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