What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. However, after investigating YTO International Express and Supply Chain Technology (HKG:6123), we don't think it's current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What Is It?
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. Analysts use this formula to calculate it for YTO International Express and Supply Chain Technology:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.078 = HK$102m ÷ (HK$2.2b - HK$873m) (Based on the trailing twelve months to December 2023).
So, YTO International Express and Supply Chain Technology has an ROCE of 7.8%. On its own, that's a low figure but it's around the 6.6% average generated by the Logistics industry.
See our latest analysis for YTO International Express and Supply Chain Technology
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating YTO International Express and Supply Chain Technology's past further, check out this free graph covering YTO International Express and Supply Chain Technology's past earnings, revenue and cash flow.
The Trend Of ROCE
When we looked at the ROCE trend at YTO International Express and Supply Chain Technology, we didn't gain much confidence. Around five years ago the returns on capital were 18%, but since then they've fallen to 7.8%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
On a side note, YTO International Express and Supply Chain Technology has done well to pay down its current liabilities to 40% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.
The Bottom Line On YTO International Express and Supply Chain Technology's ROCE
We're a bit apprehensive about YTO International Express and Supply Chain Technology because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Long term shareholders who've owned the stock over the last five years have experienced a 34% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.
If you want to know some of the risks facing YTO International Express and Supply Chain Technology we've found 2 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.
While YTO International Express and Supply Chain Technology 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com