There Are Reasons To Feel Uneasy About YTO International Express and Supply Chain Technology's (HKG:6123) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. In light of that, when we looked at YTO International Express and Supply Chain Technology (HKG:6123) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for YTO International Express and Supply Chain Technology:

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

0.077 = HK$103m ÷ (HK$2.1b - HK$757m) (Based on the trailing twelve months to June 2023).

So, YTO International Express and Supply Chain Technology has an ROCE of 7.7%. On its own that's a low return, but compared to the average of 5.1% generated by the Logistics industry, it's much better.

View our latest analysis for YTO International Express and Supply Chain Technology

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 , check out these free graphs detailing revenue and cash flow performance of YTO International Express and Supply Chain Technology.

So How Is YTO International Express and Supply Chain Technology's ROCE Trending?

When we looked at the ROCE trend at YTO International Express and Supply Chain Technology, we didn't gain much confidence. Around five years ago the returns on capital were 19%, but since then they've fallen to 7.7%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, YTO International Express and Supply Chain Technology has done well to pay down its current liabilities to 36% 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.

In Conclusion...

In summary, we're somewhat concerned by YTO International Express and Supply Chain Technology's diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 61% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you'd like to know about the risks facing YTO International Express and Supply Chain Technology, we've discovered 2 warning signs that you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.