Yan Tat Group Holdings' (HKG:1480) Returns On Capital Not Reflecting Well On The Business

What trends should we look for it we want to identify stocks that can 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Yan Tat Group Holdings (HKG:1480), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Yan Tat Group Holdings:

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

0.054 = HK$41m ÷ (HK$973m - HK$210m) (Based on the trailing twelve months to December 2020).

So, Yan Tat Group Holdings has an ROCE of 5.4%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 8.6%.

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

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Yan Tat Group Holdings doesn't inspire confidence. To be more specific, ROCE has fallen from 9.7% 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 related note, Yan Tat Group Holdings has decreased its current liabilities to 22% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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.

The Key Takeaway

In summary, Yan Tat Group Holdings is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 11% in the last five years. Therefore based on the analysis done in this article, we don't think Yan Tat Group Holdings has the makings of a multi-bagger.

If you want to continue researching Yan Tat Group Holdings, you might be interested to know about the 3 warning signs that our analysis has discovered.

While Yan Tat Group 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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