Hebei Yichen Industrial Group (HKG:1596) Is Reinvesting At Lower Rates Of Return

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Hebei Yichen Industrial Group (HKG:1596), we don't think it's current trends fit the mold of a multi-bagger.

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

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. The formula for this calculation on Hebei Yichen Industrial Group is:

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

0.022 = CN¥57m ÷ (CN¥3.4b - CN¥902m) (Based on the trailing twelve months to June 2023).

Thus, Hebei Yichen Industrial Group has an ROCE of 2.2%. Ultimately, that's a low return and it under-performs the Machinery industry average of 7.1%.

View our latest analysis for Hebei Yichen Industrial Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hebei Yichen Industrial Group's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Hebei Yichen Industrial Group, check out these free graphs here.

The Trend Of ROCE

When we looked at the ROCE trend at Hebei Yichen Industrial Group, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 2.2% from 11% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Key Takeaway

In summary, we're somewhat concerned by Hebei Yichen Industrial Group's diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 20% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a final note, we found 2 warning signs for Hebei Yichen Industrial Group (1 is a bit unpleasant) you should be aware of.

While Hebei Yichen Industrial Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.