Returns On Capital At Beijing Yupont Electric Power Technology (SHSE:688597) Paint A Concerning Picture

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Although, when we looked at Beijing Yupont Electric Power Technology (SHSE:688597), it didn't seem to tick all of these boxes.

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 Beijing Yupont Electric Power Technology:

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

0.029 = CN¥37m ÷ (CN¥1.6b - CN¥340m) (Based on the trailing twelve months to March 2024).

So, Beijing Yupont Electric Power Technology has an ROCE of 2.9%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 6.0%.

View our latest analysis for Beijing Yupont Electric Power Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Beijing Yupont Electric Power Technology's ROCE against it's prior returns. If you'd like to look at how Beijing Yupont Electric Power Technology has performed in the past in other metrics, you can view this free graph of Beijing Yupont Electric Power Technology's past earnings, revenue and cash flow.

So How Is Beijing Yupont Electric Power Technology's ROCE Trending?

We weren't thrilled with the trend because Beijing Yupont Electric Power Technology's ROCE has reduced by 66% over the last five years, while the business employed 189% more capital. Usually this isn't ideal, but given Beijing Yupont Electric Power Technology conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Beijing Yupont Electric Power Technology might not have received a full period of earnings contribution from it.

On a side note, Beijing Yupont Electric Power Technology has done well to pay down its current liabilities to 21% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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.

What We Can Learn From Beijing Yupont Electric Power Technology's ROCE

To conclude, we've found that Beijing Yupont Electric Power Technology is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 31% in the last year. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with Beijing Yupont Electric Power Technology (including 1 which can't be ignored) .

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.