Yadong Group Holdings (HKG:1795) Is Reinvesting At Lower Rates Of Return

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Looking at Yadong Group Holdings (HKG:1795), it does have a high ROCE right now, but lets see how returns are trending.

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 Yadong Group Holdings is:

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

0.24 = CN¥67m ÷ (CN¥768m - CN¥492m) (Based on the trailing twelve months to December 2022).

So, Yadong Group Holdings has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Luxury industry average of 9.3%.

See our latest analysis for Yadong Group Holdings

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

What Does the ROCE Trend For Yadong Group Holdings Tell Us?

When we looked at the ROCE trend at Yadong Group Holdings, we didn't gain much confidence. Historically returns on capital were even higher at 39%, but they have dropped over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a separate but related note, it's important to know that Yadong Group Holdings has a current liabilities to total assets ratio of 64%, which we'd consider pretty high. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Yadong Group Holdings' ROCE

While returns have fallen for Yadong Group Holdings in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And long term investors must be optimistic going forward because the stock has returned a huge 237% to shareholders in the last year. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

On a final note, we found 2 warning signs for Yadong Group Holdings (1 shouldn't be ignored) you should be aware of.

Yadong Group Holdings is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.