We love these underlying return on capital trends at CITIC Resources Holdings (HKG: 1205)

Did you know that certain financial measures can provide clues about a potential multi-bagger? Generally, we will want to notice a growing trend to recover on capital employed (ROCE) and at the same time, a based capital employed. Put simply, these types of businesses are dialing machines, which means they continually reinvest their profits at ever higher rates of return. So on that note, CITIC Resources Holdings (HKG: 1205) looks pretty promising when it comes to its return on capital trends.

Understanding Return on Capital Employed (ROCE)

For those who don’t know, ROCE is a measure of a company’s annual pre-tax profit (its return), relative to the capital employed in the company. Analysts use this formula to calculate it for CITIC Resources Holdings:

Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)

0.022 = HK $ 232 million ÷ (HK $ 12 billion – HK $ 1.4 billion) (Based on the last twelve months up to June 2021).

Thereby, CITIC Resources Holdings has a ROCE of 2.2%. In absolute terms, this is a low return and it is also below the industry average for commercial distributors of 3.7%.

View our latest analysis for CITIC Resources Holdings

SEHK: 1205 Return on capital employed August 29, 2021

Although the past is not representative of the future, it can be useful to know the historical performance of a company, which is why we have this graph above. If you want to look at CITIC Resources Holdings’ performance in the past in other metrics, you can check out this free graph of past income, income and cash flow.

What the ROCE trend can tell us

We are delighted to see that CITIC Resources Holdings is reaping the benefits of its investments and has now returned to profitability. While the company was not profitable in the past, it has now turned the tables and gained 2.2% on its capital. On top of that, what’s interesting is that the amount of capital used has remained stable, so the company didn’t need to put in extra money to generate those higher returns. That being said, while an increase in efficiency is undoubtedly appealing, it would be helpful to know if the company has any investment plans for the future. After all, a business can only become a multi-bagger in the long run if it continually reinvests itself at high rates of return.

Another thing to note, CITIC Resources Holdings reduced current liabilities to 12% of total assets during this period, effectively reducing the amount of financing from suppliers or short-term creditors. So this improvement in ROCE came from the underlying economics of the business, which is great to see.

What we can learn from CITIC Resources Holdings’ ROCE

To sum up, CITIC Resources Holdings collects higher returns for the same amount of capital, and that’s impressive. Savvy investors may have an opportunity here because the stock has fallen 46% in the past five years. However, research into current valuation metrics and the company’s future prospects seems appropriate.

CITIC Resources Holdings does involve certain risks, however, we have observed 3 warning signs in our investment analysis, and 1 of them cannot be ignored …

While CITIC Resources Holdings does not currently generate the highest returns, we have compiled a list of companies that currently generate over 25% return on equity. Check it out free list here.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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