There Are Reasons To Feel Uneasy About Yihai International Holding's (HKG:1579) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, while the ROCE is currently high for Yihai International Holding (HKG:1579), we aren't jumping out of our chairs because returns are decreasing.

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. To calculate this metric for Yihai International Holding, this is the formula:

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

0.22 = CN¥1.2b ÷ (CN¥6.1b - CN¥817m) (Based on the trailing twelve months to December 2023).

Therefore, Yihai International Holding has an ROCE of 22%. That's a fantastic return and not only that, it outpaces the average of 8.9% earned by companies in a similar industry.

View our latest analysis for Yihai International Holding

Above you can see how the current ROCE for Yihai International Holding 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 analyst report for Yihai International Holding .

What The Trend Of ROCE Can Tell Us

In terms of Yihai International Holding's historical ROCE movements, the trend isn't fantastic. While it's comforting that the ROCE is high, five years ago it was 33%. 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.

Our Take On Yihai International Holding's ROCE

To conclude, we've found that Yihai International Holding is reinvesting in the business, but returns have been falling. Since the stock has declined 62% over the last five years, investors may not be too optimistic on this trend improving either. 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.

If you want to continue researching Yihai International Holding, you might be interested to know about the 1 warning sign that our analysis has discovered.

Yihai International Holding is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.