Yanpai Filtration Technology (SZSE:301081) Will Be Hoping To Turn Its Returns On Capital Around

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. In light of that, when we looked at Yanpai Filtration Technology (SZSE:301081) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Yanpai Filtration Technology, this is the formula:

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

0.042 = CN¥46m ÷ (CN¥1.5b - CN¥448m) (Based on the trailing twelve months to September 2023).

So, Yanpai Filtration Technology has an ROCE of 4.2%. Ultimately, that's a low return and it under-performs the Luxury industry average of 5.7%.

View our latest analysis for Yanpai Filtration Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Yanpai Filtration Technology's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Yanpai Filtration Technology.

What Can We Tell From Yanpai Filtration Technology's ROCE Trend?

When we looked at the ROCE trend at Yanpai Filtration Technology, we didn't gain much confidence. To be more specific, ROCE has fallen from 25% over the last five years. However it looks like Yanpai Filtration Technology might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

To conclude, we've found that Yanpai Filtration Technology is reinvesting in the business, but returns have been falling. Unsurprisingly then, the total return to shareholders over the last year has been flat. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you want to know some of the risks facing Yanpai Filtration Technology we've found 4 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.

While Yanpai Filtration Technology 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.