YLI Holdings Berhad (KLSE:YLI) Shareholders Will Want The ROCE Trajectory To Continue

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Speaking of which, we noticed some great changes in YLI Holdings Berhad's (KLSE:YLI) returns on capital, so let's have a 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 YLI Holdings Berhad:

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

0.0035 = RM382k ÷ (RM185m - RM76m) (Based on the trailing twelve months to June 2021).

Thus, YLI Holdings Berhad has an ROCE of 0.4%. In absolute terms, that's a low return and it also under-performs the Building industry average of 9.1%.

See our latest analysis for YLI Holdings Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for YLI Holdings Berhad's ROCE against it's prior returns. If you're interested in investigating YLI Holdings Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

Like most people, we're pleased that YLI Holdings Berhad is now generating some pretax earnings. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 0.4% on their capital employed. In regards to capital employed, YLI Holdings Berhad is using 33% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 41% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Bottom Line On YLI Holdings Berhad's ROCE

In the end, YLI Holdings Berhad has proven it's capital allocation skills are good with those higher returns from less amount of capital. And since the stock has fallen 22% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

YLI Holdings Berhad does have some risks though, and we've spotted 2 warning signs for YLI Holdings Berhad that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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.

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