Yinsheng Digifavor (HKG:3773) Is Looking To Continue Growing Its Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Yinsheng Digifavor (HKG:3773) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Yinsheng Digifavor:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.068 = CN¥20m ÷ (CN¥413m - CN¥122m) (Based on the trailing twelve months to December 2023).

Therefore, Yinsheng Digifavor has an ROCE of 6.8%. Ultimately, that's a low return and it under-performs the Wireless Telecom industry average of 10%.

Check out our latest analysis for Yinsheng Digifavor

Historical performance is a great place to start when researching a stock so above you can see the gauge for Yinsheng Digifavor's ROCE against it's prior returns. If you're interested in investigating Yinsheng Digifavor's past further, check out this free graph covering Yinsheng Digifavor's past earnings, revenue and cash flow.

What Does the ROCE Trend For Yinsheng Digifavor Tell Us?

We're delighted to see that Yinsheng Digifavor is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 6.8% which is a sight for sore eyes. In addition to that, Yinsheng Digifavor is employing 56% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 30%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

The Bottom Line On Yinsheng Digifavor's ROCE

To the delight of most shareholders, Yinsheng Digifavor has now broken into profitability. And a remarkable 190% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you'd like to know about the risks facing Yinsheng Digifavor, we've discovered 2 warning signs that you should be aware of.

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.

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