Will Yau Lee Holdings' (HKG:406) Growth In ROCE Persist?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Yau Lee Holdings (HKG:406) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Yau Lee Holdings is:

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%. Ultimately, that's a low return and it under-performs the Construction industry average of 10%.

See 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.

So How Is Yau Lee Holdings' ROCE Trending?

Shareholders will be relieved that Yau Lee Holdings has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 1.7% on its capital. 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. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 49%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

Our Take 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. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. With that in mind, we believe the promising trends warrant this stock for further investigation.

Yau Lee Holdings does have some risks though, and we've spotted 4 warning signs for Yau Lee Holdings that you might be interested in.

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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