Returns On Capital At Yangtze Optical Fibre And Cable Limited (HKG:6869) Paint A Concerning Picture

By
Simply Wall St
Published
July 25, 2021
SEHK:6869
Source: Shutterstock

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Yangtze Optical Fibre And Cable Limited (HKG:6869) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.032 = CN¥387m ÷ (CN¥17b - CN¥4.6b) (Based on the trailing twelve months to March 2021).

Thus, Yangtze Optical Fibre And Cable Limited has an ROCE of 3.2%. Ultimately, that's a low return and it under-performs the Communications industry average of 7.0%.

Check out our latest analysis for Yangtze Optical Fibre And Cable Limited

roce
SEHK:6869 Return on Capital Employed July 26th 2021

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.

What The Trend Of ROCE Can Tell Us

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 3.2% from 15% five years ago. 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.

On a related note, Yangtze Optical Fibre And Cable Limited has decreased its current liabilities to 28% of total assets. That could partly explain why the ROCE has dropped. 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

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. These trends are starting to be recognized by investors since the stock has delivered a 19% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

Yangtze Optical Fibre And Cable Limited does have some risks though, and we've spotted 2 warning signs for Yangtze Optical Fibre And Cable Limited that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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