Investors Should Be Encouraged By Yadea Group Holdings' (HKG:1585) 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. And in light of that, the trends we're seeing at Yadea Group Holdings' (HKG:1585) look very promising so lets take a look.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Yadea Group Holdings, this is the formula:

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

0.34 = CN¥2.7b ÷ (CN¥26b - CN¥18b) (Based on the trailing twelve months to June 2023).

Thus, Yadea Group Holdings has an ROCE of 34%. That's a fantastic return and not only that, it outpaces the average of 5.9% earned by companies in a similar industry.

See our latest analysis for Yadea Group Holdings

In the above chart we have measured Yadea Group Holdings' 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 report for Yadea Group Holdings.

The Trend Of ROCE

We like the trends that we're seeing from Yadea Group Holdings. Over the last five years, returns on capital employed have risen substantially to 34%. The amount of capital employed has increased too, by 205%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

On a side note, Yadea Group Holdings' current liabilities are still rather high at 69% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

To sum it up, Yadea Group Holdings has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 441% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

While Yadea Group Holdings looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether 1585 is currently trading for a fair price.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.