Be Wary Of Shanghai Yct Electronics GroupLtd (SZSE:301099) And Its Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Although, when we looked at Shanghai Yct Electronics GroupLtd (SZSE:301099), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Shanghai Yct Electronics GroupLtd, this is the formula:

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

0.11 = CN¥184m ÷ (CN¥2.7b - CN¥1.1b) (Based on the trailing twelve months to March 2024).

Thus, Shanghai Yct Electronics GroupLtd has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Electronic industry average of 5.3% it's much better.

See our latest analysis for Shanghai Yct Electronics GroupLtd

In the above chart we have measured Shanghai Yct Electronics GroupLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Shanghai Yct Electronics GroupLtd .

What The Trend Of ROCE Can Tell Us

In terms of Shanghai Yct Electronics GroupLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 11% from 29% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Shanghai Yct Electronics GroupLtd has decreased its current liabilities to 41% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Keep in mind 41% is still pretty high, so those risks are still somewhat prevalent.

What We Can Learn From Shanghai Yct Electronics GroupLtd's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Shanghai Yct Electronics GroupLtd is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 19% in the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One more thing, we've spotted 4 warning signs facing Shanghai Yct Electronics GroupLtd that you might find interesting.

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.