Capital Allocation Trends At Tianjin Yiyi Hygiene ProductsLtd (SZSE:001206) Aren't Ideal

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. Although, when we looked at Tianjin Yiyi Hygiene ProductsLtd (SZSE:001206), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Tianjin Yiyi Hygiene ProductsLtd is:

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

0.11 = CN¥210m ÷ (CN¥2.1b - CN¥229m) (Based on the trailing twelve months to September 2024).

Therefore, Tianjin Yiyi Hygiene ProductsLtd has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Household Products industry average of 3.8% it's much better.

See our latest analysis for Tianjin Yiyi Hygiene ProductsLtd

In the above chart we have measured Tianjin Yiyi Hygiene ProductsLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Tianjin Yiyi Hygiene ProductsLtd for free.

What Does the ROCE Trend For Tianjin Yiyi Hygiene ProductsLtd Tell Us?

When we looked at the ROCE trend at Tianjin Yiyi Hygiene ProductsLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 11% from 22% five years ago. 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.

On a related note, Tianjin Yiyi Hygiene ProductsLtd has decreased its current liabilities to 11% 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. 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 Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Tianjin Yiyi Hygiene ProductsLtd is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 13% over the last three years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

On a separate note, we've found 1 warning sign for Tianjin Yiyi Hygiene ProductsLtd you'll probably want to know about.

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.