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

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. 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.

What Is 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)

0.034 = 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%.

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

How Are Returns Trending?

When we looked at the ROCE trend at Yangtze Optical Fibre And Cable Limited, we didn't gain much 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that Yangtze Optical Fibre And Cable Limited is reinvesting for growth and has higher sales as a result. These trends don't appear to have influenced returns though, because the total return from the stock has been mostly flat over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you'd like to know about the risks facing Yangtze Optical Fibre And Cable Limited, we've discovered 1 warning sign that you should be aware of.

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.