The Returns At Yunnan Water Investment (HKG:6839) Aren't Growing

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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. However, after investigating Yunnan Water Investment (HKG:6839), we don't think it's current trends fit the mold of a multi-bagger.

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. 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)

0.07 = CN¥1.7b ÷ (CN¥48b - CN¥23b) (Based on the trailing twelve months to June 2021).

So, Yunnan Water Investment has an ROCE of 7.0%. On its own that's a low return on capital but it's in line with the industry's average returns of 7.5%.

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're interested in investigating Yunnan Water Investment's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Yunnan Water Investment's ROCE Trending?

In terms of Yunnan Water Investment's historical ROCE trend, it doesn't exactly demand attention. The company has employed 210% more capital in the last five years, and the returns on that capital have remained stable at 7.0%. 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.

On a side note, Yunnan Water Investment's current liabilities are still rather high at 48% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Yunnan Water Investment's ROCE

As we've seen above, Yunnan Water Investment's returns on capital haven't increased but it is reinvesting in the business. Moreover, since the stock has crumbled 74% over the last five years, it appears investors are expecting the worst. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

One final note, you should learn about the 4 warning signs we've spotted with Yunnan Water Investment (including 2 which are a bit unpleasant) .

While Yunnan Water Investment may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.