Investors Could Be Concerned With Hebei Yichen Industrial Group's (HKG:1596) 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Hebei Yichen Industrial Group (HKG:1596), we don't think it's current trends fit the mold of a multi-bagger.

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 Hebei Yichen Industrial Group, this is the formula:

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

0.033 = CN¥89m ÷ (CN¥3.6b - CN¥919m) (Based on the trailing twelve months to December 2022).

So, Hebei Yichen Industrial Group has an ROCE of 3.3%. Ultimately, that's a low return and it under-performs the Machinery industry average of 7.0%.

Check out 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'd like to look at how Hebei Yichen Industrial Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

SWOT Analysis for Hebei Yichen Industrial Group

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Hebei Yichen Industrial Group doesn't inspire confidence. To be more specific, ROCE has fallen from 13% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line On Hebei Yichen Industrial Group's ROCE

Bringing it all together, while we're somewhat encouraged by Hebei Yichen Industrial Group's reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 37% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you'd like to know about the risks facing Hebei Yichen Industrial Group, we've discovered 1 warning sign that you should be aware of.

While Hebei Yichen Industrial Group isn't earning the highest return, check out this free list of companies that are 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.