The Returns On Capital At ShenZhen YUTO Packaging Technology (SZSE:002831) Don't Inspire Confidence

What are the early trends we should look for to identify a stock that could 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating ShenZhen YUTO Packaging Technology (SZSE:002831), we don't think it's current trends fit the mold of a multi-bagger.

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

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. Analysts use this formula to calculate it for ShenZhen YUTO Packaging Technology:

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

0.15 = CN¥2.0b ÷ (CN¥23b - CN¥9.6b) (Based on the trailing twelve months to September 2024).

So, ShenZhen YUTO Packaging Technology has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Packaging industry average of 5.2% it's much better.

Check out our latest analysis for ShenZhen YUTO Packaging Technology

In the above chart we have measured ShenZhen YUTO Packaging Technology'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 ShenZhen YUTO Packaging Technology .

How Are Returns Trending?

In terms of ShenZhen YUTO Packaging Technology's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 15% from 20% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Another thing to note, ShenZhen YUTO Packaging Technology has a high ratio of current liabilities to total assets of 42%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On ShenZhen YUTO Packaging Technology's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that ShenZhen YUTO Packaging Technology is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 0.1% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

If you'd like to know about the risks facing ShenZhen YUTO Packaging Technology, we've discovered 1 warning sign that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.