Shandong Yulong Gold's (SHSE:601028) Returns On Capital Are Heading Higher

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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 Shandong Yulong Gold (SHSE:601028) and its trend of ROCE, we really liked what we saw.

Understanding 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 Shandong Yulong Gold:

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

0.18 = CN¥748m ÷ (CN¥8.5b - CN¥4.4b) (Based on the trailing twelve months to March 2024).

Therefore, Shandong Yulong Gold has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 6.0% generated by the Trade Distributors industry.

View our latest analysis for Shandong Yulong Gold

Above you can see how the current ROCE for Shandong Yulong Gold compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Shandong Yulong Gold for free.

What Does the ROCE Trend For Shandong Yulong Gold Tell Us?

The fact that Shandong Yulong Gold is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 18% on its capital. And unsurprisingly, like most companies trying to break into the black, Shandong Yulong Gold is utilizing 73% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 51% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

Our Take On Shandong Yulong Gold's ROCE

In summary, it's great to see that Shandong Yulong Gold has managed to break into profitability and is continuing to reinvest in its business. Since the stock has returned a staggering 176% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you'd like to know about the risks facing Shandong Yulong Gold, we've discovered 2 warning signs that you should be aware of.

While Shandong Yulong Gold 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.