Returns Are Gaining Momentum At YCIC Eco-TechnologyLtd (SZSE:002200)

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. So on that note, YCIC Eco-TechnologyLtd (SZSE:002200) looks quite promising in regards to its trends of return on capital.

Understanding 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 YCIC Eco-TechnologyLtd, this is the formula:

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

0.016 = CN¥25m ÷ (CN¥2.8b - CN¥1.2b) (Based on the trailing twelve months to September 2023).

Thus, YCIC Eco-TechnologyLtd has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 5.5%.

See our latest analysis for YCIC Eco-TechnologyLtd

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

What Does the ROCE Trend For YCIC Eco-TechnologyLtd Tell Us?

YCIC Eco-TechnologyLtd has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 1.6% on its capital. And unsurprisingly, like most companies trying to break into the black, YCIC Eco-TechnologyLtd is utilizing 228% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

One more thing to note, YCIC Eco-TechnologyLtd has decreased current liabilities to 43% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

The Key Takeaway

In summary, it's great to see that YCIC Eco-TechnologyLtd has managed to break into profitability and is continuing to reinvest in its business. Given the stock has declined 19% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for YCIC Eco-TechnologyLtd (of which 1 is a bit unpleasant!) that you should know about.

While YCIC Eco-TechnologyLtd 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.