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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at CITIC Resources Holdings (HKG:1205) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on CITIC Resources Holdings is:

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

0.075 = HK$764m ÷ (HK$13b - HK$2.9b) (Based on the trailing twelve months to June 2024).

Thus, CITIC Resources Holdings has an ROCE of 7.5%. In absolute terms, that's a low return, but it's much better than the Industrials industry average of 3.3%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for CITIC Resources Holdings' ROCE against it's prior returns. If you'd like to look at how CITIC Resources Holdings has performed in the past in other metrics, you can view this free graph of CITIC Resources Holdings' past earnings, revenue and cash flow.

What Can We Tell From CITIC Resources Holdings' ROCE Trend?

We're delighted to see that CITIC Resources Holdings is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 7.5%, which is always encouraging. While returns have increased, the amount of capital employed by CITIC Resources Holdings has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

What We Can Learn From CITIC Resources Holdings' ROCE

To bring it all together, CITIC Resources Holdings has done well to increase the returns it's generating from its capital employed. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 6.2% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

If you'd like to know about the risks facing CITIC Resources Holdings, we've discovered 3 warning signs that you should be aware of.

While CITIC Resources Holdings 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.

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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.