Returns On Capital At China Youran Dairy Group (HKG:9858) Have Stalled

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So, when we ran our eye over China Youran Dairy Group's (HKG:9858) trend of ROCE, we liked what we saw.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its 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).

So, 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 9.1% 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 current returns on capital are decent, they haven't changed much. Over the past three years, ROCE has remained relatively flat at around 14% and the business has deployed 269% more capital into its operations. 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.

The Key Takeaway

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 56%, 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.

If you'd like to know more about China Youran Dairy Group, we've spotted 3 warning signs, and 2 of them don't sit too well with us.

While China Youran Dairy Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.