Yangtze Optical Fibre And Cable Limited (HKG:6869) May Have Issues Allocating Its Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Yangtze Optical Fibre And Cable Limited (HKG:6869), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What is it?

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)

0.019 = CN¥244m ÷ (CN¥19b - CN¥5.6b) (Based on the trailing twelve months to September 2021).

So, Yangtze Optical Fibre And Cable Limited has an ROCE of 1.9%. In absolute terms, that's a low return and it also under-performs the Communications industry average of 7.1%.

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

What The Trend Of ROCE Can Tell Us

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 14% over the last five years. 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.

In Conclusion...

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. However, despite the promising trends, the stock has fallen 18% over the last five years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Yangtze Optical Fibre And Cable Limited does have some risks though, and we've spotted 1 warning sign for Yangtze Optical Fibre And Cable Limited that you might be interested in.

While Yangtze Optical Fibre And Cable Limited may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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.

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