YCIC Eco-TechnologyLtd (SZSE:002200) Might Be Having Difficulty Using Its Capital Effectively

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating YCIC Eco-TechnologyLtd (SZSE:002200), we don't think it's current trends fit the mold of a multi-bagger.

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 YCIC Eco-TechnologyLtd, this is the formula:

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

0.0013 = CN¥2.0m ÷ (CN¥3.0b - CN¥1.5b) (Based on the trailing twelve months to June 2024).

Therefore, YCIC Eco-TechnologyLtd has an ROCE of 0.1%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 5.6%.

View 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're interested in investigating YCIC Eco-TechnologyLtd's past further, check out this free graph covering YCIC Eco-TechnologyLtd's past earnings, revenue and cash flow.

So How Is YCIC Eco-TechnologyLtd's ROCE Trending?

In terms of YCIC Eco-TechnologyLtd's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 17% 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, YCIC Eco-TechnologyLtd has done well to pay down its current liabilities to 49% 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. 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. Keep in mind 49% is still pretty high, so those risks are still somewhat prevalent.

What We Can Learn From YCIC Eco-TechnologyLtd's ROCE

To conclude, we've found that YCIC Eco-TechnologyLtd is reinvesting in the business, but returns have been falling. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. Therefore based on the analysis done in this article, we don't think YCIC Eco-TechnologyLtd has the makings of a multi-bagger.

While YCIC Eco-TechnologyLtd doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation for 002200 on our platform.

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.