Investors Met With Slowing Returns on Capital At Yongmao Holdings (SGX:BKX)

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Yongmao Holdings (SGX:BKX) 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 Yongmao Holdings:

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

0.06 = CN¥61m ÷ (CN¥2.0b - CN¥974m) (Based on the trailing twelve months to September 2022).

So, Yongmao Holdings has an ROCE of 6.0%. Even though it's in line with the industry average of 6.4%, it's still a low return by itself.

See our latest analysis for Yongmao Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Yongmao Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Yongmao Holdings, check out these free graphs here.

What Does the ROCE Trend For Yongmao Holdings Tell Us?

The returns on capital haven't changed much for Yongmao Holdings in recent years. The company has employed 35% more capital in the last five years, and the returns on that capital have remained stable at 6.0%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

On a separate but related note, it's important to know that Yongmao Holdings has a current liabilities to total assets ratio of 49%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Yongmao Holdings' ROCE

In summary, Yongmao Holdings has simply been reinvesting capital and generating the same low rate of return as before. Since the stock has gained an impressive 56% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One final note, you should learn about the 2 warning signs we've spotted with Yongmao Holdings (including 1 which is a bit concerning) .

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.

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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.