The Returns On Capital At Beijing Oriental Yuhong Waterproof Technology (SZSE:002271) Don't Inspire Confidence

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. In light of that, when we looked at Beijing Oriental Yuhong Waterproof Technology (SZSE:002271) and its ROCE trend, we weren't exactly thrilled.

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. 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)

0.11 = CN¥3.3b ÷ (CN¥48b - CN¥17b) (Based on the trailing twelve months to March 2024).

So, Beijing Oriental Yuhong Waterproof Technology has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 6.1% generated by the Basic Materials industry.

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.

How Are Returns Trending?

In terms of Beijing Oriental Yuhong Waterproof Technology's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 11% from 19% 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 may take some time before the company starts to see any change in earnings from these investments.

On a side note, Beijing Oriental Yuhong Waterproof Technology has done well to pay down its current liabilities to 36% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Beijing Oriental Yuhong Waterproof Technology's ROCE

To conclude, we've found that Beijing Oriental Yuhong Waterproof Technology is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 16% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

On a final note, we've found 1 warning sign for Beijing Oriental Yuhong Waterproof Technology that we think you should be aware of.

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.