The Returns On Capital At Edianyun (HKG:2416) Don't Inspire Confidence

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Edianyun (HKG:2416) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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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. The formula for this calculation on Edianyun is:

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

0.082 = CN¥175m ÷ (CN¥3.5b - CN¥1.4b) (Based on the trailing twelve months to December 2024).

So, Edianyun has an ROCE of 8.2%. On its own that's a low return, but compared to the average of 6.7% generated by the IT industry, it's much better.

See our latest analysis for Edianyun

Historical performance is a great place to start when researching a stock so above you can see the gauge for Edianyun's ROCE against it's prior returns. If you'd like to look at how Edianyun has performed in the past in other metrics, you can view this free graph of Edianyun's past earnings, revenue and cash flow.

So How Is Edianyun's ROCE Trending?

In terms of Edianyun's historical ROCE movements, the trend isn't fantastic. Over the last three years, returns on capital have decreased to 8.2% from 14% three years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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 related note, Edianyun has decreased its current liabilities to 39% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Edianyun's ROCE

To conclude, we've found that Edianyun is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 81% over the last year. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

On a final note, we've found 1 warning sign for Edianyun that we think you should be aware of.

While Edianyun 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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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.