Some Investors May Be Worried About Yunnan Energy Investment's (SZSE:002053) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Yunnan Energy Investment (SZSE:002053) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

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 Yunnan Energy Investment, this is the formula:

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

0.047 = CN¥720m ÷ (CN¥18b - CN¥2.6b) (Based on the trailing twelve months to March 2024).

Thus, Yunnan Energy Investment has an ROCE of 4.7%. In absolute terms, that's a low return and it also under-performs the Food industry average of 7.6%.

Check out our latest analysis for Yunnan Energy Investment

Above you can see how the current ROCE for Yunnan Energy Investment 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 Yunnan Energy Investment .

What Can We Tell From Yunnan Energy Investment's ROCE Trend?

On the surface, the trend of ROCE at Yunnan Energy Investment doesn't inspire confidence. Around five years ago the returns on capital were 6.5%, but since then they've fallen to 4.7%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line On Yunnan Energy Investment's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Yunnan Energy Investment. Furthermore the stock has climbed 71% over the last five years, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you want to know some of the risks facing Yunnan Energy Investment we've found 3 warning signs (2 are significant!) that you should be aware of before investing here.

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.

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