- Hong Kong
Be Wary Of Yangtze Optical Fibre And Cable Limited (HKG:6869) And Its Returns On Capital
What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Yangtze Optical Fibre And Cable Limited (HKG:6869), it didn't seem to tick all of these boxes.
What Is 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. Analysts use this formula to calculate it for Yangtze Optical Fibre And Cable Limited:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.06 = CN¥1.2b ÷ (CN¥28b - CN¥8.5b) (Based on the trailing twelve months to December 2022).
Thus, Yangtze Optical Fibre And Cable Limited has an ROCE of 6.0%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.4%.
Check out our latest analysis for Yangtze Optical Fibre And Cable Limited
In the above chart we have measured Yangtze Optical Fibre And Cable Limited's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
How Are Returns Trending?
On the surface, the trend of ROCE at Yangtze Optical Fibre And Cable Limited doesn't inspire confidence. To be more specific, ROCE has fallen from 24% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
What We Can Learn From Yangtze Optical Fibre And Cable Limited's ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Yangtze Optical Fibre And Cable Limited. However, despite the promising trends, the stock has fallen 56% over the last five years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
If you're still interested in Yangtze Optical Fibre And Cable Limited it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
Valuation is complex, but we're helping make it simple.
Find out whether Yangtze Optical Fibre And Cable Limited is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.View the Free Analysis
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.
Yangtze Optical Fibre And Cable Limited
Yangtze Optical Fibre And Cable Joint Stock Limited Company provides optical fiber and cable products.
Undervalued with excellent balance sheet.