Returns On Capital At Yunnan Energy New Material (SZSE:002812) Paint A Concerning Picture

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Yunnan Energy New Material (SZSE:002812) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. 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)

0.05 = CN¥1.8b ÷ (CN¥49b - CN¥14b) (Based on the trailing twelve months to June 2024).

So, Yunnan Energy New Material has an ROCE of 5.0%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.5%.

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're interested, you can view the analysts predictions in our free analyst report for Yunnan Energy New Material .

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Yunnan Energy New Material doesn't inspire confidence. To be more specific, ROCE has fallen from 15% over the last five years. 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On Yunnan Energy New Material's ROCE

Bringing it all together, while we're somewhat encouraged by Yunnan Energy New Material's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 2.2% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Yunnan Energy New Material (of which 2 are potentially serious!) that you should know about.

While Yunnan Energy New Material may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.