Investors Met With Slowing Returns on Capital At Yuanda China Holdings (HKG:2789)

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Yuanda China Holdings (HKG:2789), we don't think it's current trends fit the mold of a multi-bagger.

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 Yuanda China Holdings, this is the formula:

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

0.026 = CN¥69m ÷ (CN¥7.6b - CN¥4.9b) (Based on the trailing twelve months to December 2021).

Therefore, Yuanda China Holdings has an ROCE of 2.6%. In absolute terms, that's a low return and it also under-performs the Building industry average of 11%.

See our latest analysis for Yuanda China Holdings

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

What Does the ROCE Trend For Yuanda China Holdings Tell Us?

Over the past five years, Yuanda China Holdings' ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So don't be surprised if Yuanda China Holdings doesn't end up being a multi-bagger in a few years time.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 64% of total assets, is good to see from a business owner's perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously. Although because current liabilities are still 64%, some of that risk is still prevalent.

In Conclusion...

In summary, Yuanda China Holdings isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And in the last five years, the stock has given away 70% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Yuanda China Holdings does have some risks though, and we've spotted 3 warning signs for Yuanda China Holdings that you might be interested in.

While Yuanda China 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.