Yeal Electric's (SZSE:300923) Returns On Capital Not Reflecting Well On The Business

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Yeal Electric (SZSE:300923) and its ROCE trend, we weren't exactly thrilled.

What Is 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. To calculate this metric for Yeal Electric, this is the formula:

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

0.024 = CN¥28m ÷ (CN¥1.3b - CN¥156m) (Based on the trailing twelve months to September 2023).

Therefore, Yeal Electric has an ROCE of 2.4%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 6.0%.

See our latest analysis for Yeal Electric

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

The Trend Of ROCE

In terms of Yeal Electric's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 10% over the last five years. 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 may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Yeal Electric's ROCE

Bringing it all together, while we're somewhat encouraged by Yeal Electric's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 50% in the last three years. Therefore based on the analysis done in this article, we don't think Yeal Electric has the makings of a multi-bagger.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Yeal Electric (of which 1 shouldn't be ignored!) that you should know about.

While Yeal Electric isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.