Ye Xing Group Holdings (HKG:1941) Might Be Having Difficulty Using Its Capital Effectively

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Ye Xing Group Holdings (HKG:1941) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Ye Xing Group Holdings is:

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

0.12 = CN¥28m ÷ (CN¥428m - CN¥194m) (Based on the trailing twelve months to December 2020).

So, Ye Xing Group Holdings has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 9.3% generated by the Commercial Services industry.

See our latest analysis for Ye Xing Group Holdings

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Ye Xing Group Holdings, check out these free graphs here.

So How Is Ye Xing Group Holdings' ROCE Trending?

In terms of Ye Xing Group Holdings' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 45% over the last four years. 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Ye Xing Group Holdings has decreased its current liabilities to 45% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

The Bottom Line

To conclude, we've found that Ye Xing Group Holdings is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 47% in the last year. Therefore based on the analysis done in this article, we don't think Ye Xing Group Holdings has the makings of a multi-bagger.

One more thing, we've spotted 2 warning signs facing Ye Xing Group Holdings that you might find interesting.

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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