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Did you know that there are some financial indicators that can provide clues to potential baggers? In a perfect world, we’d like to see a company invest more capital in its business and ideally get an increasing return on that capital. Simply put, these types of businesses are compound interest machines, meaning they continually reinvest their earnings at higher rates of return.In view of this, when we look at Renrui Human Resources Technology Holdings (HKG:6919) and its ROCE trend, we’re not exactly excited about.
Return on Capital Employed (ROCE): What is it?
If you’re not sure, just to clarify, ROCE is a metric that evaluates how much pre-tax income (measured as a percentage) a company earns from the capital invested in its business. The calculation formula of Renrui Human Resources Technology Holdings is:
Return on capital employed = Earnings before interest and tax (EBIT) ÷ (Total assets – Current liabilities)
0.048 = RMB 72 million ÷ (RMB 2.2b – RMB 649 million) (Based on trailing 12 months to June 2023).
therefore, Renrui Human Resources Technology Holdings has an ROCE of 4.8%. Ultimately, this return is low, lower than the 12% average for the professional services industry.
Check out our latest analysis for Renrui Human Resources Technology Holdings
In the chart above, we measure Renrui Human Resources Technology Holdings Ltd’s previous ROCE based on prior performance, but the future is arguably more important.If you’d like, you can check out the forecasts from the analysts at Renrui Human Resources Technology Holdings free.
ROCE Trend
Judging from the historical ROCE changes of Renrui Human Resources Technology Holdings Co., Ltd., the trend is not ideal. Return on capital has fallen to 4.8% over the past five years from 40% five years ago. At the same time, the business is leveraging more capital, but this hasn’t had a huge impact on sales over the last 12 months, so this may reflect longer-term investment. It may be some time before companies see any change in earnings from these investments.
On the other hand, Renrui Human Resources Technology Holdings has also performed well, with its current liabilities falling to 30% of total assets. So we can tie some of that to the decline in ROCE. In practical terms, this means their suppliers or short-term creditors have less money to fund the business, reducing some of the risk factors. Since the business is essentially funding more of its operations with its own capital, you could argue that this reduces the efficiency with which the business generates ROCE.
Renrui Human Resources Technology Holdings ROCE bottom line
All in all, Renrui Human Resources Technology Holdings is putting money back into the business to grow, but unfortunately, sales don’t seem to be increasing much yet. Investors appear to have little hope that these trends will improve, which may be part of the reason the stock has plummeted 86% over the past three years. All in all, inherent tendencies aren’t typical of baggers, so if that’s what you’re after, we think you might have more luck elsewhere.
Additionally, we found 1 warning sign for Renrui Human Resources Technology Holdings You might want to know.
For those who like investing A strong enterprise, check it out free List of companies with strong balance sheets and high return on equity.
Valuation is complex, but we’re helping to make it simple.
Find out if Renrui Human Resources Technology Holdings is potentially overvalued or undervalued by checking out our comprehensive analysis, which includes Fair value estimates, risks and warnings, dividends, insider trading and financial health.
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This article from Simply Wall St is general in nature. We only use unbiased methodologies to provide commentary based on historical data and analyst forecasts, and our articles are not intended to provide financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or your financial situation. Our goal is to provide you with long-term focused analysis driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative information. Simply Wall St has no position in any of the stocks mentioned.
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