Returns On Capital Are A Standout For Yankuang Energy Group (HKG:1171)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. And in light of that, the trends we're seeing at Yankuang Energy Group's (HKG:1171) look very promising so lets take a look.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Yankuang Energy Group, this is the formula:

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

0.24 = CN¥54b ÷ (CN¥295b - CN¥74b) (Based on the trailing twelve months to December 2022).

Therefore, Yankuang Energy Group has an ROCE of 24%. That's a fantastic return and not only that, it outpaces the average of 9.3% earned by companies in a similar industry.

Check out our latest analysis for Yankuang Energy Group

In the above chart we have measured Yankuang Energy Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Yankuang Energy Group.

What Does the ROCE Trend For Yankuang Energy Group Tell Us?

The trends we've noticed at Yankuang Energy Group are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 24%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 65%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

The Bottom Line On Yankuang Energy Group's ROCE

To sum it up, Yankuang Energy Group has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Yankuang Energy Group does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is significant...

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.