China Youran Dairy Group's (HKG:9858) Returns Have Hit A Wall

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So, when we ran our eye over China Youran Dairy Group's (HKG:9858) trend of ROCE, we liked what we saw.

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 China Youran Dairy Group:

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

0.14 = CN¥3.3b ÷ (CN¥36b - CN¥14b) (Based on the trailing twelve months to June 2022).

Thus, China Youran Dairy Group has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Food industry average of 8.9% it's much better.

See our latest analysis for China Youran Dairy Group

Above you can see how the current ROCE for China Youran Dairy Group 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 China Youran Dairy Group.

So How Is China Youran Dairy Group's ROCE Trending?

While the returns on capital are good, they haven't moved much. The company has consistently earned 14% for the last three years, and the capital employed within the business has risen 269% in that time. Since 14% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

In Conclusion...

In the end, China Youran Dairy Group has proven its ability to adequately reinvest capital at good rates of return. Yet over the last year the stock has declined 57%, so the decline might provide an opening. For that reason, savvy investors might want to look further into this company in case it's a prime investment.

China Youran Dairy Group does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those are concerning...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and 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.