Returns On Capital Signal Tricky Times Ahead For Guangdong Yussen Energy Technology (SZSE:002986)

There are a few key trends to look for if we want to identify the next multi-bagger. 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 Guangdong Yussen Energy Technology (SZSE:002986), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

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 Guangdong Yussen Energy Technology, this is the formula:

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

0.064 = CN¥392m ÷ (CN¥7.6b - CN¥1.5b) (Based on the trailing twelve months to September 2024).

Therefore, Guangdong Yussen Energy Technology has an ROCE of 6.4%. On its own, that's a low figure but it's around the 5.5% average generated by the Chemicals industry.

View our latest analysis for Guangdong Yussen Energy Technology

Above you can see how the current ROCE for Guangdong Yussen Energy Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Guangdong Yussen Energy Technology for free.

How Are Returns Trending?

Unfortunately, the trend isn't great with ROCE falling from 24% five years ago, while capital employed has grown 487%. Usually this isn't ideal, but given Guangdong Yussen Energy Technology 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 Guangdong Yussen Energy Technology might not have received a full period of earnings contribution from it.

Our Take On Guangdong Yussen Energy Technology's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Guangdong Yussen Energy Technology is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 31% over the last three years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One final note, you should learn about the 4 warning signs we've spotted with Guangdong Yussen Energy Technology (including 1 which is potentially serious) .

While Guangdong Yussen Energy Technology 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.