Shareholders Would Enjoy A Repeat Of Yadea Group Holdings' (HKG:1585) Recent Growth In Returns

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Yadea Group Holdings' (HKG:1585) returns on capital, so let's have a look.

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 Yadea Group Holdings, this is the formula:

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

0.33 = CN¥2.4b ÷ (CN¥25b - CN¥18b) (Based on the trailing twelve months to December 2022).

Thus, Yadea Group Holdings has an ROCE of 33%. In absolute terms that's a great return and it's even better than the Auto industry average of 2.5%.

See 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 to see what analysts are forecasting going forward, you should check out our free report for Yadea Group Holdings.

SWOT Analysis for Yadea Group Holdings

How Are Returns Trending?

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 33%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 200%. 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 separate but related note, it's important to know that Yadea Group Holdings has a current liabilities to total assets ratio of 70%, which we'd consider pretty high. 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.

The Bottom Line On Yadea Group Holdings' ROCE

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 475% 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.

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation on our platform that is definitely worth checking out.

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.