Yue Yuen Industrial (Holdings) (HKG:551) Is Finding It Tricky To Allocate Its Capital

When researching a stock for investment, what can tell us that the company is in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. And from a first read, things don't look too good at Yue Yuen Industrial (Holdings) (HKG:551), so let's see why.

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 Yue Yuen Industrial (Holdings):

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

0.021 = US$127m ÷ (US$8.5b - US$2.3b) (Based on the trailing twelve months to March 2021).

So, Yue Yuen Industrial (Holdings) has an ROCE of 2.1%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 7.0%.

Check out our latest analysis for Yue Yuen Industrial (Holdings)

Above you can see how the current ROCE for Yue Yuen Industrial (Holdings) compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Yue Yuen Industrial (Holdings) here for free.

What The Trend Of ROCE Can Tell Us

We are a bit worried about the trend of returns on capital at Yue Yuen Industrial (Holdings). Unfortunately the returns on capital have diminished from the 6.7% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Yue Yuen Industrial (Holdings) becoming one if things continue as they have.

The Bottom Line On Yue Yuen Industrial (Holdings)'s ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. And long term shareholders have watched their investments stay flat over the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a final note, we found 3 warning signs for Yue Yuen Industrial (Holdings) (1 makes us a bit uncomfortable) you should be aware of.

While Yue Yuen Industrial (Holdings) may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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