Here's What's Concerning About YCIH Green High-Performance Concrete's (HKG:1847) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Looking at YCIH Green High-Performance Concrete (HKG:1847), it does have a high ROCE right now, but lets see how returns are trending.

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. Analysts use this formula to calculate it for YCIH Green High-Performance Concrete:

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

0.22 = CN¥308m ÷ (CN¥4.6b - CN¥3.2b) (Based on the trailing twelve months to December 2020).

So, YCIH Green High-Performance Concrete has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Basic Materials industry average of 15%.

View our latest analysis for YCIH Green High-Performance Concrete

Historical performance is a great place to start when researching a stock so above you can see the gauge for YCIH Green High-Performance Concrete's ROCE against it's prior returns. If you're interested in investigating YCIH Green High-Performance Concrete's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For YCIH Green High-Performance Concrete Tell Us?

When we looked at the ROCE trend at YCIH Green High-Performance Concrete, we didn't gain much confidence. To be more specific, while the ROCE is still high, it's fallen from 45% where it was four years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, YCIH Green High-Performance Concrete's current liabilities are still rather high at 69% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On YCIH Green High-Performance Concrete's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that YCIH Green High-Performance Concrete is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 10% to shareholders over the last year. So should these growth trends continue, we'd be optimistic on the stock going forward.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for YCIH Green High-Performance Concrete (of which 1 is a bit unpleasant!) that you should know about.

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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