The Returns On Capital At Yunnan Water Investment (HKG:6839) Don't Inspire Confidence

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Yunnan Water Investment (HKG:6839) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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)

0.0024 = CN¥82m ÷ (CN¥47b - CN¥12b) (Based on the trailing twelve months to December 2023).

Thus, Yunnan Water Investment has an ROCE of 0.2%. In absolute terms, that's a low return and it also under-performs the Water Utilities industry average of 6.2%.

View our latest analysis for Yunnan Water Investment

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

What Can We Tell From Yunnan Water Investment's ROCE Trend?

On the surface, the trend of ROCE at Yunnan Water Investment doesn't inspire confidence. To be more specific, ROCE has fallen from 5.1% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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.

The Bottom Line

We're a bit apprehensive about Yunnan Water Investment because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Unsurprisingly then, the stock has dived 91% over the last five years, so investors are recognizing these changes and don't like the company's prospects. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Yunnan Water Investment does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those are significant...

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.