There Are Reasons To Feel Uneasy About Tianjin Yiyi Hygiene ProductsLtd's (SZSE:001206) Returns On Capital

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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Tianjin Yiyi Hygiene ProductsLtd (SZSE:001206) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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)

0.097 = CN¥177m ÷ (CN¥2.0b - CN¥194m) (Based on the trailing twelve months to March 2024).

Thus, Tianjin Yiyi Hygiene ProductsLtd has an ROCE of 9.7%. On its own that's a low return, but compared to the average of 5.4% generated by the Household Products industry, it's much better.

See our latest analysis for Tianjin Yiyi Hygiene ProductsLtd

Above you can see how the current ROCE for Tianjin Yiyi Hygiene ProductsLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Tianjin Yiyi Hygiene ProductsLtd for free.

So How Is Tianjin Yiyi Hygiene ProductsLtd's ROCE Trending?

In terms of Tianjin Yiyi Hygiene ProductsLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 9.7% from 22% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Tianjin Yiyi Hygiene ProductsLtd has done well to pay down its current liabilities to 9.6% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

In summary, Tianjin Yiyi Hygiene ProductsLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Additionally, the stock's total return to shareholders over the last year has been flat, which isn't too surprising. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Tianjin Yiyi Hygiene ProductsLtd does have some risks though, and we've spotted 1 warning sign for Tianjin Yiyi Hygiene ProductsLtd that you might be interested in.

While Tianjin Yiyi Hygiene ProductsLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.