Returns On Capital At Yibin Tianyuan Group (SZSE:002386) Paint A Concerning Picture

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Yibin Tianyuan Group (SZSE:002386), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Yibin Tianyuan Group, this is the formula:

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

0.00074 = CN¥8.6m ÷ (CN¥20b - CN¥8.8b) (Based on the trailing twelve months to September 2023).

Thus, Yibin Tianyuan Group has an ROCE of 0.07%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 5.7%.

See our latest analysis for Yibin Tianyuan Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Yibin Tianyuan Group's ROCE against it's prior returns. If you're interested in investigating Yibin Tianyuan Group's past further, check out this free graph covering Yibin Tianyuan Group's past earnings, revenue and cash flow.

What Can We Tell From Yibin Tianyuan Group's ROCE Trend?

Unfortunately, the trend isn't great with ROCE falling from 8.8% five years ago, while capital employed has grown 69%. Usually this isn't ideal, but given Yibin Tianyuan Group 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 Yibin Tianyuan Group might not have received a full period of earnings contribution from it.

On a side note, Yibin Tianyuan Group has done well to pay down its current liabilities to 43% 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. 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. Keep in mind 43% is still pretty high, so those risks are still somewhat prevalent.

The Bottom Line

In summary, Yibin Tianyuan Group 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 five years has been flat, which isn't too surprising. Therefore based on the analysis done in this article, we don't think Yibin Tianyuan Group has the makings of a multi-bagger.

If you'd like to know more about Yibin Tianyuan Group, we've spotted 4 warning signs, and 1 of them can't be ignored.

While Yibin Tianyuan Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.