Yip's Chemical Holdings' (HKG:408) Returns On Capital Tell Us There Is Reason To Feel Uneasy

When researching a stock for investment, what can tell us that the company is in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after glancing at the trends within Yip's Chemical Holdings (HKG:408), we weren't too hopeful.

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. Analysts use this formula to calculate it for Yip's Chemical Holdings:

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

0.0016 = HK$6.1m ÷ (HK$6.5b - HK$2.7b) (Based on the trailing twelve months to June 2023).

So, Yip's Chemical Holdings has an ROCE of 0.2%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 14%.

View our latest analysis for Yip's Chemical Holdings

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'd like to look at how Yip's Chemical Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

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

The trend of ROCE at Yip's Chemical Holdings is showing some signs of weakness. To be more specific, today's ROCE was 9.7% five years ago but has since fallen to 0.2%. In addition to that, Yip's Chemical Holdings is now employing 22% less capital than it was five years ago. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.

On a side note, Yip's Chemical Holdings' current liabilities are still rather high at 41% 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.

What We Can Learn From Yip's Chemical Holdings' ROCE

To see Yip's Chemical Holdings reducing the capital employed in the business in tandem with diminishing returns, is concerning. Despite the concerning underlying trends, the stock has actually gained 14% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

One more thing: We've identified 3 warning signs with Yip's Chemical Holdings (at least 1 which shouldn't be ignored) , and understanding these would certainly be useful.

While Yip's Chemical Holdings 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.