Capital Allocation Trends At Yangtze Optical Fibre And Cable Limited (HKG:6869) Aren't Ideal

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing 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)?

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. To calculate this metric for Yangtze Optical Fibre And Cable Limited, this is the formula:

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

0.026 = CN¥552m ÷ (CN¥31b - CN¥9.4b) (Based on the trailing twelve months to September 2024).

Thus, Yangtze Optical Fibre And Cable Limited has an ROCE of 2.6%. In absolute terms, that's a low return and it also under-performs the Communications industry average of 3.7%.

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'd like, you can check out the forecasts from the analysts covering Yangtze Optical Fibre And Cable Limited for free.

So How Is Yangtze Optical Fibre And Cable Limited's ROCE Trending?

On the surface, the trend of ROCE at Yangtze Optical Fibre And Cable Limited doesn't inspire confidence. Around five years ago the returns on capital were 9.2%, but since then they've fallen to 2.6%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line On Yangtze Optical Fibre And Cable Limited's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Yangtze Optical Fibre And Cable Limited have fallen, meanwhile the business is employing more capital than it was five years ago. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing, we've spotted 2 warning signs facing Yangtze Optical Fibre And Cable Limited that you might find interesting.

While Yangtze Optical Fibre And Cable Limited 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.