Capital Allocation Trends At Beijing Oriental Yuhong Waterproof Technology (SZSE:002271) Aren't Ideal

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 Beijing Oriental Yuhong Waterproof Technology (SZSE:002271) 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 Beijing Oriental Yuhong Waterproof Technology is:

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

0.091 = CN¥2.7b ÷ (CN¥47b - CN¥17b) (Based on the trailing twelve months to June 2024).

Therefore, Beijing Oriental Yuhong Waterproof Technology has an ROCE of 9.1%. On its own that's a low return, but compared to the average of 5.9% generated by the Basic Materials industry, it's much better.

See our latest analysis for Beijing Oriental Yuhong Waterproof Technology

In the above chart we have measured Beijing Oriental Yuhong Waterproof Technology'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 Beijing Oriental Yuhong Waterproof Technology for free.

So How Is Beijing Oriental Yuhong Waterproof Technology's ROCE Trending?

When we looked at the ROCE trend at Beijing Oriental Yuhong Waterproof Technology, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 9.1% from 21% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

In summary, Beijing Oriental Yuhong Waterproof Technology is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 27% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Beijing Oriental Yuhong Waterproof Technology does have some risks though, and we've spotted 1 warning sign for Beijing Oriental Yuhong Waterproof Technology that you might be interested in.

While Beijing Oriental Yuhong Waterproof Technology isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.