RLX Technology (NYSE:RLX) Knows How To Allocate Capital Effectively
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. 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, the ROCE of RLX Technology (NYSE:RLX) looks great, so lets see what the trend can tell us.
Understanding 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. Analysts use this formula to calculate it for RLX Technology:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.22 = CN¥3.0b ÷ (CN¥16b - CN¥2.3b) (Based on the trailing twelve months to March 2022).
Therefore, RLX Technology has an ROCE of 22%. In absolute terms that's a very respectable return and compared to the Tobacco industry average of 23% it's pretty much on par.
See our latest analysis for RLX Technology
In the above chart we have measured RLX Technology's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for RLX Technology.
How Are Returns Trending?
The trends we've noticed at RLX Technology are quite reassuring. The data shows that returns on capital have increased substantially over the last three years to 22%. The amount of capital employed has increased too, by 6,347%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 15%, 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.
In Conclusion...
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 RLX Technology has. However the stock is down a substantial 74% in the last year so there could be other areas of the business hurting its prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.
If you want to continue researching RLX Technology, you might be interested to know about the 1 warning sign that our analysis has discovered.
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.
