Should You Be Impressed By Yunnan Water Investment's (HKG:6839) Returns on Capital?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. However, after briefly looking over the numbers, we don't think Yunnan Water Investment (HKG:6839) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

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 Yunnan Water Investment, this is the formula:

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

0.042 = CN¥1.3b ÷ (CN¥42b - CN¥11b) (Based on the trailing twelve months to September 2020).

So, Yunnan Water Investment has an ROCE of 4.2%. In absolute terms, that's a low return and it also under-performs the Water Utilities industry average of 7.4%.

View our latest analysis for Yunnan Water Investment

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 Yunnan Water Investment, check out these free graphs here.

The Trend Of ROCE

There are better returns on capital out there than what we're seeing at Yunnan Water Investment. The company has employed 328% more capital in the last five years, and the returns on that capital have remained stable at 4.2%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Key Takeaway

Long story short, while Yunnan Water Investment has been reinvesting its capital, the returns that it's generating haven't increased. And investors appear hesitant that the trends will pick up because the stock has fallen 66% in the last five years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you want to know some of the risks facing Yunnan Water Investment we've found 6 warning signs (3 can't be ignored!) that you should be aware of before investing here.

While Yunnan Water Investment isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. 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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