Returns On Capital Are A Standout For Yadea Group Holdings (HKG:1585)

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, the ROCE of Yadea Group Holdings (HKG:1585) looks great, so lets see what the trend can tell us.

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

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. Analysts use this formula to calculate it for Yadea Group Holdings:

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

0.29 = CN¥2.7b ÷ (CN¥26b - CN¥16b) (Based on the trailing twelve months to December 2023).

So, Yadea Group Holdings has an ROCE of 29%. That's a fantastic return and not only that, it outpaces the average of 6.0% earned by companies in a similar industry.

Check out our latest analysis for Yadea Group Holdings

Above you can see how the current ROCE for Yadea Group Holdings 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 Yadea Group Holdings for free.

What The Trend Of ROCE Can Tell Us

The trends we've noticed at Yadea Group Holdings are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 29%. Basically the business is earning more per dollar of capital invested and in addition to that, 229% more capital is being employed now too. So we're very much inspired by what we're seeing at Yadea Group Holdings thanks to its ability to profitably reinvest capital.

On a side note, Yadea Group Holdings' current liabilities are still rather high at 64% 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.

Our Take On Yadea Group Holdings' ROCE

In summary, it's great to see that Yadea Group Holdings can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And a remarkable 653% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Like most companies, Yadea Group Holdings does come with some risks, and we've found 1 warning sign that you should be aware of.

Yadea Group Holdings is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.

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