Zhejiang Yankon Group (SHSE:600261) Will Be Hoping To Turn Its Returns On Capital Around

What financial metrics can indicate to us that a company is maturing or even in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. On that note, looking into Zhejiang Yankon Group (SHSE:600261), we weren't too upbeat about how things were going.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Zhejiang Yankon Group:

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

0.049 = CN¥182m ÷ (CN¥5.2b - CN¥1.4b) (Based on the trailing twelve months to September 2024).

Therefore, Zhejiang Yankon Group has an ROCE of 4.9%. On its own, that's a low figure but it's around the 5.8% average generated by the Electrical industry.

View our latest analysis for Zhejiang Yankon Group

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 Zhejiang Yankon Group's past further, check out this free graph covering Zhejiang Yankon Group's past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Zhejiang Yankon Group's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 14% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Zhejiang Yankon Group becoming one if things continue as they have.

What We Can Learn From Zhejiang Yankon Group's ROCE

In summary, it's unfortunate that Zhejiang Yankon Group is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 16% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

One more thing: We've identified 3 warning signs with Zhejiang Yankon Group (at least 1 which is concerning) , and understanding them would certainly be useful.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.