Yue Yuen Industrial (Holdings)'s (HKG:551) Returns On Capital Not Reflecting Well On The Business

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. On that note, looking into Yue Yuen Industrial (Holdings) (HKG:551), we weren't too upbeat about how things were going.

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. 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)

0.044 = US$259m ÷ (US$7.9b - US$2.0b) (Based on the trailing twelve months to March 2023).

Therefore, Yue Yuen Industrial (Holdings) has an ROCE of 4.4%. Ultimately, that's a low return and it under-performs the Luxury industry average of 11%.

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 to see what analysts are forecasting going forward, you should check out our free report for Yue Yuen Industrial (Holdings).

SWOT Analysis for Yue Yuen Industrial (Holdings)

What Can We Tell From Yue Yuen Industrial (Holdings)'s ROCE Trend?

There is reason to be cautious about Yue Yuen Industrial (Holdings), given the returns are trending downwards. To be more specific, the ROCE was 8.0% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. 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.

Our Take On Yue Yuen Industrial (Holdings)'s ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors haven't taken kindly to these developments, since the stock has declined 39% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Like most companies, Yue Yuen Industrial (Holdings) does come with some risks, and we've found 1 warning sign that you should be aware of.

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.