There Are Reasons To Feel Uneasy About Yusei Holdings' (HKG:96) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Yusei Holdings (HKG:96), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Yusei Holdings, this is the formula:

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

0.056 = CN¥66m ÷ (CN¥2.6b - CN¥1.5b) (Based on the trailing twelve months to June 2024).

Thus, Yusei Holdings has an ROCE of 5.6%. Even though it's in line with the industry average of 6.0%, it's still a low return by itself.

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

How Are Returns Trending?

In terms of Yusei Holdings' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 7.9% 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a separate but related note, it's important to know that Yusei Holdings has a current liabilities to total assets ratio of 55%, 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.

Our Take On Yusei Holdings' ROCE

In summary, Yusei Holdings is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 49% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Yusei Holdings does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is potentially serious...

While Yusei 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.