Investors Could Be Concerned With Yunnan Energy New Material's (SZSE:002812) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. Having said that, from a first glance at Yunnan Energy New Material (SZSE:002812) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

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 Yunnan Energy New Material is:

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

0.099 = CN¥3.5b ÷ (CN¥47b - CN¥12b) (Based on the trailing twelve months to September 2023).

Therefore, Yunnan Energy New Material has an ROCE of 9.9%. In absolute terms, that's a low return, but it's much better than the Chemicals industry average of 5.8%.

View our latest analysis for Yunnan Energy New Material

In the above chart we have measured Yunnan Energy New Material'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 Yunnan Energy New Material for free.

So How Is Yunnan Energy New Material's ROCE Trending?

We weren't thrilled with the trend because Yunnan Energy New Material's ROCE has reduced by 24% over the last five years, while the business employed 637% more capital. That being said, Yunnan Energy New Material raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Yunnan Energy New Material might not have received a full period of earnings contribution from it.

The Bottom Line

In summary, Yunnan Energy New Material is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors may be recognizing these trends since the stock has only returned a total of 22% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you'd like to know about the risks facing Yunnan Energy New Material, we've discovered 3 warning signs that you should be aware of.

While Yunnan Energy New Material 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.