Ling Yui Holdings (HKG:784) Is Experiencing Growth In Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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, Ling Yui Holdings (HKG:784) looks quite promising in regards to its trends of return on capital.

We've discovered 3 warning signs about Ling Yui Holdings. View them for free.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for Ling Yui Holdings:

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

0.042 = HK$3.6m ÷ (HK$158m - HK$72m) (Based on the trailing twelve months to September 2024).

Therefore, Ling Yui Holdings has an ROCE of 4.2%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 5.8%.

See our latest analysis for Ling Yui Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Ling Yui Holdings' ROCE against it's prior returns. If you'd like to look at how Ling Yui Holdings has performed in the past in other metrics, you can view this free graph of Ling Yui Holdings' past earnings, revenue and cash flow.

The Trend Of ROCE

Like most people, we're pleased that Ling Yui Holdings is now generating some pretax earnings. The company was generating losses five years ago, but now it's turned around, earning 4.2% which is no doubt a relief for some early shareholders. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 25%. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

On a side note, Ling Yui Holdings' current liabilities are still rather high at 45% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Ling Yui Holdings' ROCE

In summary, it's great to see that Ling Yui Holdings has been able to turn things around and earn higher returns on lower amounts of capital. Although the company may be facing some issues elsewhere since the stock has plunged 96% in the last five years. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Ling Yui Holdings (of which 2 are potentially serious!) that you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.