Yip's Chemical Holdings (HKG:408) Is Looking To Continue Growing Its Returns On Capital

By
Simply Wall St
Published
August 12, 2021
SEHK:408
Source: Shutterstock

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Yip's Chemical Holdings (HKG:408) looks quite promising in regards to its trends of return on capital.

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 Yip's Chemical Holdings, this is the formula:

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

0.12 = HK$626m ÷ (HK$8.4b - HK$3.2b) (Based on the trailing twelve months to December 2020).

Therefore, Yip's Chemical Holdings has an ROCE of 12%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Chemicals industry average of 11%.

Check out our latest analysis for Yip's Chemical Holdings

roce
SEHK:408 Return on Capital Employed August 12th 2021

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

What Can We Tell From Yip's Chemical Holdings' ROCE Trend?

Yip's Chemical Holdings is showing promise given that its ROCE is trending up and to the right. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 90% over the last five years. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

Our Take On Yip's Chemical Holdings' ROCE

As discussed above, Yip's Chemical Holdings appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Since the stock has returned a staggering 147% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

On a separate note, we've found 1 warning sign for Yip's Chemical Holdings you'll probably want to know about.

While Yip's Chemical Holdings 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.

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