What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Yihai International Holding (HKG:1579), they do have a high ROCE, but we weren't exactly elated from how returns are trending.
We've discovered 1 warning sign about Yihai International Holding. View them for free.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 Yihai International Holding is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.22 = CN¥1.1b ÷ (CN¥5.8b - CN¥903m) (Based on the trailing twelve months to December 2024).
Thus, Yihai International Holding has an ROCE of 22%. That's a fantastic return and not only that, it outpaces the average of 9.2% earned by companies in a similar industry.
See our latest analysis for Yihai International Holding
Above you can see how the current ROCE for Yihai International Holding compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Yihai International Holding .
What Does the ROCE Trend For Yihai International Holding Tell Us?
On the surface, the trend of ROCE at Yihai International Holding doesn't inspire confidence. To be more specific, while the ROCE is still high, it's fallen from 38% where it was five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
What We Can Learn From Yihai International Holding's ROCE
Bringing it all together, while we're somewhat encouraged by Yihai International Holding's reinvestment in its own business, we're aware that returns are shrinking. Moreover, since the stock has crumbled 75% over the last five years, it appears investors are expecting the worst. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
Like most companies, Yihai International Holding does come with some risks, and we've found 1 warning sign that you should be aware of.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.