Returns On Capital Signal Tricky Times Ahead For Yee Hop Holdings (HKG:1662)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Yee Hop Holdings (HKG:1662), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

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 Yee Hop Holdings is:

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

0.049 = HK$36m ÷ (HK$878m - HK$149m) (Based on the trailing twelve months to March 2022).

Thus, Yee Hop Holdings has an ROCE of 4.9%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 7.0%.

Check out our latest analysis for Yee Hop Holdings

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Yee Hop Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Yee Hop Holdings' ROCE Trending?

On the surface, the trend of ROCE at Yee Hop Holdings doesn't inspire confidence. Over the last five years, returns on capital have decreased to 4.9% from 10.0% 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 Bottom Line

We're a bit apprehensive about Yee Hop Holdings because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Investors must expect better things on the horizon though because the stock has risen 6.1% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Like most companies, Yee Hop Holdings does come with some risks, and we've found 3 warning signs that you should be aware of.

While Yee Hop Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.