Returns On Capital Signal Tricky Times Ahead For Yusei Holdings (HKG:96)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Yusei Holdings (HKG:96) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Yusei Holdings is:

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

0.066 = CN¥49m ÷ (CN¥1.6b - CN¥862m) (Based on the trailing twelve months to December 2020).

Thus, Yusei Holdings has an ROCE of 6.6%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 9.5%.

View our latest analysis for Yusei Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Yusei Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Yusei Holdings, check out these free graphs here.

How Are Returns Trending?

When we looked at the ROCE trend at Yusei Holdings, we didn't gain much confidence. To be more specific, ROCE has fallen from 19% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a separate but related note, it's important to know that Yusei Holdings has a current liabilities to total assets ratio of 54%, which we'd consider pretty high. 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.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Yusei Holdings' reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 20% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you'd like to know more about Yusei Holdings, we've spotted 2 warning signs, and 1 of them can't be ignored.

While Yusei 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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