Capital Allocation Trends At Yik Wo International Holdings (HKG:8659) Aren't Ideal

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Yik Wo International Holdings (HKG:8659), it didn't seem to tick all of these boxes.

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 Yik Wo International Holdings:

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

0.17 = CN¥44m ÷ (CN¥314m - CN¥48m) (Based on the trailing twelve months to December 2023).

Thus, Yik Wo International Holdings has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 7.0% generated by the Packaging industry.

View our latest analysis for Yik Wo International Holdings

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

The Trend Of ROCE

On the surface, the trend of ROCE at Yik Wo International Holdings doesn't inspire confidence. To be more specific, ROCE has fallen from 38% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From Yik Wo International Holdings' ROCE

While returns have fallen for Yik Wo International Holdings in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has done incredibly well with a 333% return over the last three years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

One more thing to note, we've identified 1 warning sign with Yik Wo International Holdings and understanding it should be part of your investment process.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.