Capital Allocation Trends At Yuan Long Ping High-Tech Agriculture (SZSE:000998) Aren't Ideal

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Having said that, from a first glance at Yuan Long Ping High-Tech Agriculture (SZSE:000998) 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 who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Yuan Long Ping High-Tech Agriculture:

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

0.049 = CN¥780m ÷ (CN¥27b - CN¥11b) (Based on the trailing twelve months to March 2024).

Therefore, Yuan Long Ping High-Tech Agriculture has an ROCE of 4.9%. Ultimately, that's a low return and it under-performs the Food industry average of 7.6%.

View our latest analysis for Yuan Long Ping High-Tech Agriculture

Above you can see how the current ROCE for Yuan Long Ping High-Tech Agriculture compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Yuan Long Ping High-Tech Agriculture .

What Can We Tell From Yuan Long Ping High-Tech Agriculture's ROCE Trend?

In terms of Yuan Long Ping High-Tech Agriculture's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 6.8%, but since then they've fallen to 4.9%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 40%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Yuan Long Ping High-Tech Agriculture is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 30% in the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Yuan Long Ping High-Tech Agriculture does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is concerning...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.

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