Here's What's Concerning About Zhejiang Yayi Metal TechnologyLtd's (SZSE:301113) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Zhejiang Yayi Metal TechnologyLtd (SZSE:301113) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 Zhejiang Yayi Metal TechnologyLtd, this is the formula:

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

0.026 = CN¥19m ÷ (CN¥770m - CN¥40m) (Based on the trailing twelve months to September 2023).

So, Zhejiang Yayi Metal TechnologyLtd has an ROCE of 2.6%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 9.6%.

Check out our latest analysis for Zhejiang Yayi Metal TechnologyLtd

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

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Zhejiang Yayi Metal TechnologyLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 23% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Zhejiang Yayi Metal TechnologyLtd has done well to pay down its current liabilities to 5.2% 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.

The Bottom Line

From the above analysis, we find it rather worrisome that returns on capital and sales for Zhejiang Yayi Metal TechnologyLtd have fallen, meanwhile the business is employing more capital than it was five years ago. And long term shareholders have watched their investments stay flat over the last year. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you'd like to know more about Zhejiang Yayi Metal TechnologyLtd, we've spotted 3 warning signs, and 2 of them are a bit unpleasant.

While Zhejiang Yayi Metal TechnologyLtd 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.