State Grid YingdaLtd's (SHSE:600517) Returns On Capital Not Reflecting Well On The Business

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think State Grid YingdaLtd (SHSE:600517) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

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 State Grid YingdaLtd:

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

0.11 = CN¥2.8b ÷ (CN¥45b - CN¥19b) (Based on the trailing twelve months to September 2024).

Therefore, State Grid YingdaLtd has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 5.8% generated by the Electrical industry.

View our latest analysis for State Grid YingdaLtd

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 State Grid YingdaLtd's past further, check out this free graph covering State Grid YingdaLtd's past earnings, revenue and cash flow.

What Does the ROCE Trend For State Grid YingdaLtd Tell Us?

In terms of State Grid YingdaLtd's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 29%, but since then they've fallen to 11%. However it looks like State Grid YingdaLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, State Grid YingdaLtd has decreased its current liabilities to 43% of total assets. So we could link some of this to the decrease in ROCE. 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

The Bottom Line On State Grid YingdaLtd's ROCE

To conclude, we've found that State Grid YingdaLtd is reinvesting in the business, but returns have been falling. Since the stock has declined 17% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think State Grid YingdaLtd has the makings of a multi-bagger.

On a separate note, we've found 1 warning sign for State Grid YingdaLtd you'll probably want to know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.