The Trends At Hebei Yichen Industrial Group (HKG:1596) That You Should Know About

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Hebei Yichen Industrial Group (HKG:1596) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Hebei Yichen Industrial Group:

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

0.12 = CN¥263m ÷ (CN¥2.8b - CN¥718m) (Based on the trailing twelve months to June 2020).

Thus, Hebei Yichen Industrial Group has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 8.7% generated by the Machinery industry.

See 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.

How Are Returns Trending?

On the surface, the trend of ROCE at Hebei Yichen Industrial Group doesn't inspire confidence. To be more specific, ROCE has fallen from 37% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Hebei Yichen Industrial Group has decreased its current liabilities to 25% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Hebei Yichen Industrial Group. However, despite the promising trends, the stock has fallen 33% over the last three years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

On a separate note, we've found 1 warning sign for Hebei Yichen Industrial Group you'll probably want to know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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