Yusei Holdings (HKG:96) Will Be Hoping To Turn Its Returns On Capital Around

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Yusei Holdings (HKG:96) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

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)

0.049 = CN¥40m ÷ (CN¥1.8b - CN¥998m) (Based on the trailing twelve months to December 2021).

Thus, Yusei Holdings has an ROCE of 4.9%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 12%.

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're interested in investigating Yusei Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

When we looked at the ROCE trend at Yusei Holdings, we didn't gain much confidence. Around five years ago the returns on capital were 19%, but since then they've fallen to 4.9%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Another thing to note, Yusei Holdings has a high ratio of current liabilities to total assets of 55%. 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 Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Yusei Holdings is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 42% over the last five years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Yusei Holdings (of which 2 make us uncomfortable!) that you should know about.

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.

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.