Here's What's Concerning About Yangtze Optical Fibre And Cable Limited's (HKG:6869) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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 Yangtze Optical Fibre And Cable Limited (HKG:6869) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. 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)

0.049 = CN¥1.1b ÷ (CN¥29b - CN¥7.5b) (Based on the trailing twelve months to March 2023).

Therefore, Yangtze Optical Fibre And Cable Limited has an ROCE of 4.9%. Even though it's in line with the industry average of 4.8%, it's still a low return by itself.

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 to see what analysts are forecasting going forward, you should check out our free report for Yangtze Optical Fibre And Cable Limited.

SWOT Analysis for Yangtze Optical Fibre And Cable Limited

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 24%, but since then they've fallen to 4.9%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line

While returns have fallen for Yangtze Optical Fibre And Cable Limited in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, despite the promising trends, the stock has fallen 52% 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.

One more thing to note, we've identified 1 warning sign with Yangtze Optical Fibre And Cable Limited and understanding it should be part of your investment process.

While Yangtze Optical Fibre And Cable Limited 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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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.