Returns On Capital Signal Tricky Times Ahead For Xiamen Yan Palace Bird's Nest Industry (HKG:1497)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Having said that, while the ROCE is currently high for Xiamen Yan Palace Bird's Nest Industry (HKG:1497), we aren't jumping out of our chairs because returns are decreasing.

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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 Xiamen Yan Palace Bird's Nest Industry is:

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

0.24 = CN¥206m ÷ (CN¥1.5b - CN¥611m) (Based on the trailing twelve months to December 2024).

Therefore, Xiamen Yan Palace Bird's Nest Industry has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Food industry average of 9.5%.

See our latest analysis for Xiamen Yan Palace Bird's Nest Industry

Above you can see how the current ROCE for Xiamen Yan Palace Bird's Nest Industry 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 Xiamen Yan Palace Bird's Nest Industry for free.

What Can We Tell From Xiamen Yan Palace Bird's Nest Industry's ROCE Trend?

In terms of Xiamen Yan Palace Bird's Nest Industry's historical ROCE movements, the trend isn't fantastic. Historically returns on capital were even higher at 36%, but they have dropped over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Xiamen Yan Palace Bird's Nest Industry has decreased its current liabilities to 41% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Keep in mind 41% is still pretty high, so those risks are still somewhat prevalent.

Our Take On Xiamen Yan Palace Bird's Nest Industry's ROCE

To conclude, we've found that Xiamen Yan Palace Bird's Nest Industry is reinvesting in the business, but returns have been falling. And in the last year, the stock has given away 12% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

While Xiamen Yan Palace Bird's Nest Industry doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation for 1497 on our platform.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high 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.