There Are Reasons To Feel Uneasy About Zhejiang Yayi Metal TechnologyLtd's (SZSE:301113) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. 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.

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. Analysts use this formula to calculate it for Zhejiang Yayi Metal TechnologyLtd:

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

0.025 = CN¥18m ÷ (CN¥770m - CN¥40m) (Based on the trailing twelve months to December 2023).

So, Zhejiang Yayi Metal TechnologyLtd has an ROCE of 2.5%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 8.4%.

View our latest analysis for Zhejiang Yayi Metal TechnologyLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Zhejiang Yayi Metal TechnologyLtd.

The Trend Of ROCE

In terms of Zhejiang Yayi Metal TechnologyLtd's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 25% over the last five years. However it looks like Zhejiang Yayi Metal TechnologyLtd 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.

On a related note, Zhejiang Yayi Metal TechnologyLtd has decreased its current liabilities to 5.2% of total assets. That could partly explain why the ROCE has dropped. 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Zhejiang Yayi Metal TechnologyLtd's ROCE

In summary, Zhejiang Yayi Metal TechnologyLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 29% over the last year, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Zhejiang Yayi Metal TechnologyLtd has the makings of a multi-bagger.

On a final note, we found 3 warning signs for Zhejiang Yayi Metal TechnologyLtd (1 is potentially serious) you should be aware of.

While Zhejiang Yayi Metal 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.