There Are Reasons To Feel Uneasy About Yangtze Optical Fibre And Cable Limited's (HKG:6869) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. 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. 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)

0.017 = CN¥366m ÷ (CN¥30b - CN¥8.4b) (Based on the trailing twelve months to June 2024).

Therefore, Yangtze Optical Fibre And Cable Limited has an ROCE of 1.7%. In absolute terms, that's a low return and it also under-performs the Communications industry average of 6.0%.

View 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're interested, you can view the analysts predictions in our free analyst report for Yangtze Optical Fibre And Cable Limited .

What Does the ROCE Trend For Yangtze Optical Fibre And Cable Limited Tell Us?

When we looked at the ROCE trend at Yangtze Optical Fibre And Cable Limited, we didn't gain much confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 1.7%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

Our Take On Yangtze Optical Fibre And Cable Limited's ROCE

We're a bit apprehensive about Yangtze Optical Fibre And Cable Limited because despite more capital being deployed in the business, returns on that capital and sales have both fallen. It should come as no surprise then that the stock has fallen 14% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Yangtze Optical Fibre And Cable Limited does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

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.