Thursday, March 30, 2023

The ROCE at Renrui Looks Promising

The ROCE at Renrui Looks Promising

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we’d like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it’s a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we’ve noticed some promising trends at Renrui Human Resources Technology Holdings (HKG:6919) so let’s look a bit deeper.

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 Renrui Human Resources Technology Holdings, this is the formula:

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

0.10 = CN¥134m ÷ (CN¥1.8b – CN¥493m) (Based on the trailing twelve months to December 2020).

So, Renrui Human Resources Technology Holdings has an ROCE of 10%. On its own, that’s a standard return, however it’s much better than the 1.3% generated by the Professional Services industry.

In the above chart we have measured Renrui Human Resources Technology Holdings’ prior ROCE against its prior performance, but the future is arguably more important. If you’re interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Renrui Human Resources Technology Holdings Tell Us?

Renrui Human Resources Technology Holdings has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses four years ago, but now it’s earning 10% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Renrui Human Resources Technology Holdings is utilizing 3,816% more capital than it was four years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

One more thing to note, Renrui Human Resources Technology Holdings has decreased current liabilities to 28% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. 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.

The Bottom Line

Long story short, we’re delighted to see that Renrui Human Resources Technology Holdings’ reinvestment activities have paid off and the company is now profitable. And since the stock has fallen 26% over the last year, there might be an opportunity here. That being the case, research into the company’s current valuation metrics and future prospects seems fitting.