There Are Reasons To Feel Uneasy About Yun Lee Marine Group Holdings' (HKG:2682) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Yun Lee Marine Group Holdings (HKG:2682) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is Return On Capital Employed (ROCE)?

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 Yun Lee Marine Group Holdings:

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

0.10 = HK$25m ÷ (HK$306m - HK$52m) (Based on the trailing twelve months to September 2021).

Therefore, Yun Lee Marine Group Holdings has an ROCE of 10.0%. On its own, that's a low figure but it's around the 11% average generated by the Shipping industry.

See our latest analysis for Yun Lee Marine Group Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Yun Lee Marine Group Holdings' ROCE against it's prior returns. If you'd like to look at how Yun Lee Marine Group Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Yun Lee Marine Group Holdings' ROCE Trending?

When we looked at the ROCE trend at Yun Lee Marine Group Holdings, we didn't gain much confidence. To be more specific, ROCE has fallen from 50% 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Yun Lee Marine Group Holdings has done well to pay down its current liabilities to 17% of total assets. That could partly explain why the ROCE has dropped. 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.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Yun Lee Marine Group Holdings. These growth trends haven't led to growth returns though, since the stock has fallen 23% over the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

If you'd like to know more about Yun Lee Marine Group Holdings, we've spotted 4 warning signs, and 1 of them shouldn'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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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.