Is Yongmao Holdings (SGX:BKX) Likely To Turn Things Around?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. In light of that, when we looked at Yongmao Holdings (SGX:BKX) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Yongmao Holdings, this is the formula:

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

0.051 = CN¥47m ÷ (CN¥1.7b - CN¥780m) (Based on the trailing twelve months to September 2020).

Therefore, Yongmao Holdings has an ROCE of 5.1%. In absolute terms, that's a low return but it's around the Machinery industry average of 6.3%.

Check out 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.

So How Is Yongmao Holdings' ROCE Trending?

In terms of Yongmao Holdings' historical ROCE trend, it doesn't exactly demand attention. Over the past five years, ROCE has remained relatively flat at around 5.1% and the business has deployed 32% more capital into its operations. 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.

Another thing to note, Yongmao Holdings has a high ratio of current liabilities to total assets of 46%. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Yongmao Holdings' ROCE

In conclusion, Yongmao Holdings has been investing more capital into the business, but returns on that capital haven't increased. Unsurprisingly, the stock has only gained 14% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

On a separate note, we've found 2 warning signs for Yongmao Holdings you'll probably want to know about.

While Yongmao Holdings 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. 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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