YCIH Green High-Performance Concrete's (HKG:1847) Returns On Capital Not Reflecting Well On The Business

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at YCIH Green High-Performance Concrete (HKG:1847) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the 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)

0.017 = CN¥24m ÷ (CN¥4.8b - CN¥3.4b) (Based on the trailing twelve months to June 2023).

Therefore, YCIH Green High-Performance Concrete has an ROCE of 1.7%. In absolute terms, that's a low return and it also under-performs the Basic Materials industry average of 4.2%.

Check out 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 Can We Tell From YCIH Green High-Performance Concrete's ROCE Trend?

In terms of YCIH Green High-Performance Concrete's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 1.7% from 28% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

Another thing to note, YCIH Green High-Performance Concrete has a high ratio of current liabilities to total assets of 71%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

In summary, we're somewhat concerned by YCIH Green High-Performance Concrete's diminishing returns on increasing amounts of capital. This could explain why the stock has sunk a total of 71% in the last three years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a final note, we found 3 warning signs for YCIH Green High-Performance Concrete (2 shouldn't be ignored) you should be aware of.

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.