Yee Hop Holdings (HKG:1662) Could Be Struggling To Allocate Capital

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Yee Hop Holdings (HKG:1662) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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. To calculate this metric for Yee Hop Holdings, this is the formula:

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

0.014 = HK$9.6m ÷ (HK$1.0b - HK$336m) (Based on the trailing twelve months to September 2021).

So, Yee Hop Holdings has an ROCE of 1.4%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 8.8%.

View our latest analysis for Yee Hop Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Yee Hop Holdings' ROCE against it's prior returns. If you're interested in investigating Yee Hop Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Yee Hop Holdings' ROCE Trending?

In terms of Yee Hop Holdings' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 1.4% from 30% five years ago. 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 may take some time before the company starts to see any change in earnings from these investments.

On a side note, Yee Hop Holdings' current liabilities have increased over the last five years to 32% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 1.4%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

What We Can Learn From Yee Hop Holdings' ROCE

To conclude, we've found that Yee Hop Holdings is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 34% 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.

One final note, you should learn about the 5 warning signs we've spotted with Yee Hop Holdings (including 1 which is a bit unpleasant) .

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.

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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.