Investors Could Be Concerned With YCIH Green High-Performance Concrete's (HKG:1847) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. In light of that, when we looked at YCIH Green High-Performance Concrete (HKG:1847) and its ROCE trend, we weren't exactly thrilled.

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. To calculate this metric for YCIH Green High-Performance Concrete, this is the formula:

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

0.038 = CN¥53m ÷ (CN¥4.8b - CN¥3.4b) (Based on the trailing twelve months to December 2022).

So, YCIH Green High-Performance Concrete has an ROCE of 3.8%. Ultimately, that's a low return and it under-performs the Basic Materials industry average of 5.0%.

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'd like to look at how YCIH Green High-Performance Concrete has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

When we looked at the ROCE trend at YCIH Green High-Performance Concrete, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 3.8% from 33% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, YCIH Green High-Performance Concrete's current liabilities are still rather high at 71% 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

From the above analysis, we find it rather worrisome that returns on capital and sales for YCIH Green High-Performance Concrete have fallen, meanwhile the business is employing more capital than it was five years ago. Investors haven't taken kindly to these developments, since the stock has declined 48% from where it was three years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

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 doesn't sit too well with us!) that you should know about.

While YCIH Green High-Performance Concrete isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.