Capital Allocation Trends At Yueyang Forest & Paper (SHSE:600963) Aren't Ideal

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Yueyang Forest & Paper (SHSE:600963), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

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 Yueyang Forest & Paper, this is the formula:

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

0.047 = CN¥531m ÷ (CN¥17b - CN¥5.5b) (Based on the trailing twelve months to June 2023).

Therefore, Yueyang Forest & Paper has an ROCE of 4.7%. On its own that's a low return, but compared to the average of 3.4% generated by the Forestry industry, it's much better.

View our latest analysis for Yueyang Forest & Paper

Above you can see how the current ROCE for Yueyang Forest & Paper 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 Yueyang Forest & Paper for free.

What Does the ROCE Trend For Yueyang Forest & Paper Tell Us?

Unfortunately, the trend isn't great with ROCE falling from 8.8% five years ago, while capital employed has grown 21%. Usually this isn't ideal, but given Yueyang Forest & Paper conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Yueyang Forest & Paper might not have received a full period of earnings contribution from it.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Yueyang Forest & Paper. Furthermore the stock has climbed 50% over the last five years, it would appear that investors are upbeat about the future. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

If you want to know some of the risks facing Yueyang Forest & Paper we've found 3 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

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.