Returns At Yan Tat Group Holdings (HKG:1480) Appear To Be Weighed Down

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. Having said that, from a first glance at Yan Tat Group Holdings (HKG:1480) 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)

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. The formula for this calculation on Yan Tat Group Holdings is:

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

0.066 = HK$52m ÷ (HK$1.0b - HK$267m) (Based on the trailing twelve months to June 2021).

So, Yan Tat Group Holdings has an ROCE of 6.6%. In absolute terms, that's a low return but it's around the Electronic industry average of 7.7%.

View our latest analysis for Yan Tat Group Holdings

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

What The Trend Of ROCE Can Tell Us

In terms of Yan Tat Group Holdings' historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 6.6% for the last five years, and the capital employed within the business has risen 65% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 26% of total assets, is good to see from a business owner's perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

The Key Takeaway

In summary, Yan Tat Group Holdings has simply been reinvesting capital and generating the same low rate of return as before. And investors appear hesitant that the trends will pick up because the stock has fallen 28% in the last five years. 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.

On a final note, we've found 2 warning signs for Yan Tat Group Holdings that we think you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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.

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