Investors Could Be Concerned With Yangtze Optical Fibre And Cable Limited's (HKG:6869) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. 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?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Yangtze Optical Fibre And Cable Limited is:

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

0.048 = CN¥951m ÷ (CN¥28b - CN¥8.5b) (Based on the trailing twelve months to September 2022).

Thus, Yangtze Optical Fibre And Cable Limited has an ROCE of 4.8%. In absolute terms, that's a low return but it's around the Communications industry average of 5.9%.

Our analysis indicates that 6869 is potentially undervalued!

Above you can see how the current ROCE for Yangtze Optical Fibre And Cable Limited compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Yangtze Optical Fibre And Cable Limited's ROCE Trend?

In terms of Yangtze Optical Fibre And Cable Limited's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 4.8% from 21% five years ago. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line On 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 61% over the last five years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Like most companies, Yangtze Optical Fibre And Cable Limited does come with some risks, and we've found 1 warning sign that you should be aware of.

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.

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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.