Investors Could Be Concerned With Yun Lee Marine Group Holdings' (HKG:2682) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Yun Lee Marine Group Holdings (HKG:2682) and its ROCE trend, we weren't exactly thrilled.

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

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. To calculate this metric for Yun Lee Marine Group Holdings, this is the formula:

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

0.04 = HK$9.3m ÷ (HK$258m - HK$22m) (Based on the trailing twelve months to September 2020).

So, Yun Lee Marine Group Holdings has an ROCE of 4.0%. Ultimately, that's a low return and it under-performs the Shipping industry average of 9.1%.

View our latest analysis for Yun Lee Marine Group Holdings

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Yun Lee Marine Group Holdings, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Yun Lee Marine Group Holdings doesn't inspire confidence. To be more specific, ROCE has fallen from 50% over the last four years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Yun Lee Marine Group Holdings has done well to pay down its current liabilities to 8.6% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Yun Lee Marine Group Holdings' ROCE

Bringing it all together, while we're somewhat encouraged by Yun Lee Marine Group Holdings' reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 38% over the last year, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Yun Lee Marine Group Holdings does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those can't be ignored...

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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