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

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. 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.

Understanding 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. 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)

0.034 = CN¥457m ÷ (CN¥21b - CN¥7.8b) (Based on the trailing twelve months to March 2022).

So, Yangtze Optical Fibre And Cable Limited has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the Communications industry average of 7.6%.

View our latest analysis for Yangtze Optical Fibre And Cable Limited

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

The Trend Of ROCE

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 15% 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. These growth trends haven't led to growth returns though, since the stock has fallen 21% over the last five years. 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 2 warning signs with Yangtze Optical Fibre And Cable Limited and understanding these should be part of your investment process.

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.