What Can The Trends At Yau Lee Holdings (HKG:406) Tell Us About Their Returns?

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Yau Lee Holdings (HKG:406) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Yau Lee Holdings:

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

0.017 = HK$45m ÷ (HK$5.3b - HK$2.6b) (Based on the trailing twelve months to September 2020).

Therefore, Yau Lee Holdings has an ROCE of 1.7%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 11%.

Check out our latest analysis for Yau Lee Holdings

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

What Does the ROCE Trend For Yau Lee Holdings Tell Us?

We're delighted to see that Yau Lee Holdings is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 1.7%, which is always encouraging. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

On a related note, the company's ratio of current liabilities to total assets has decreased to 49%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

The Bottom Line On Yau Lee Holdings' ROCE

In summary, we're delighted to see that Yau Lee Holdings has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Astute investors may have an opportunity here because the stock has declined 12% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

On a final note, we found 4 warning signs for Yau Lee Holdings (1 is potentially serious) you should be aware of.

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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This article by Simply Wall St is general in nature. 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.
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