The Returns On Capital At Yunnan Energy New Material (SZSE:002812) Don't Inspire Confidence

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the 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)

0.03 = CN¥1.1b ÷ (CN¥48b - CN¥13b) (Based on the trailing twelve months to September 2024).

Therefore, Yunnan Energy New Material has an ROCE of 3.0%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 5.6%.

Check out 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.

What Can We Tell From Yunnan Energy New Material's ROCE Trend?

When we looked at the ROCE trend at Yunnan Energy New Material, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 3.0% from 14% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

Our Take On Yunnan Energy New Material's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Yunnan Energy New Material have fallen, meanwhile the business is employing more capital than it was five years ago. Investors haven't taken kindly to these developments, since the stock has declined 32% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One more thing: We've identified 2 warning signs with Yunnan Energy New Material (at least 1 which is a bit unpleasant) , and understanding these would certainly be useful.

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.