Zhejiang Yayi Metal TechnologyLtd (SZSE:301113) Will Be Hoping To Turn Its Returns On Capital Around

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Zhejiang Yayi Metal TechnologyLtd (SZSE:301113) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

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)

0.026 = 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 9.7%.

Check out 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'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.

So How Is Zhejiang Yayi Metal TechnologyLtd's ROCE Trending?

When we looked at the ROCE trend at Zhejiang Yayi Metal TechnologyLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 2.6% from 23% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a related note, Zhejiang Yayi Metal TechnologyLtd has decreased its current liabilities to 5.2% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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 On Zhejiang Yayi Metal TechnologyLtd's ROCE

We're a bit apprehensive about Zhejiang Yayi Metal TechnologyLtd because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Long term shareholders who've owned the stock over the last three years have experienced a 29% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Zhejiang Yayi Metal TechnologyLtd does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those are concerning...

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.