Returns At Yangtzekiang Garment (HKG:294) Appear To Be Weighed Down

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. In light of that, when we looked at Yangtzekiang Garment (HKG:294) and its ROCE trend, we weren't exactly thrilled.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Yangtzekiang Garment is:

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

0.0056 = HK$6.3m ÷ (HK$1.2b - HK$117m) (Based on the trailing twelve months to September 2022).

So, Yangtzekiang Garment has an ROCE of 0.6%. Ultimately, that's a low return and it under-performs the Luxury industry average of 11%.

View our latest analysis for Yangtzekiang Garment

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'd like to look at how Yangtzekiang Garment has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Things have been pretty stable at Yangtzekiang Garment, with its capital employed and returns on that capital staying somewhat the same for the last five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So don't be surprised if Yangtzekiang Garment doesn't end up being a multi-bagger in a few years time.

The Bottom Line On Yangtzekiang Garment's ROCE

In summary, Yangtzekiang Garment isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And in the last five years, the stock has given away 38% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Yangtzekiang Garment does have some risks, we noticed 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

While Yangtzekiang Garment isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.