How Has Yusin Holding (TPE:4557) Allocated Its Capital?

What underlying fundamental trends can indicate that a company might be in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. On that note, looking into Yusin Holding (TPE:4557), we weren't too upbeat about how things were going.

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. The formula for this calculation on Yusin Holding is:

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

0.13 = NT$199m ÷ (NT$2.3b - NT$739m) (Based on the trailing twelve months to December 2020).

Therefore, Yusin Holding has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Auto Components industry average of 5.1% it's much better.

Check out our latest analysis for Yusin Holding

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

What Does the ROCE Trend For Yusin Holding Tell Us?

There is reason to be cautious about Yusin Holding, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 18% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Yusin Holding becoming one if things continue as they have.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 32%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 13%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

What We Can Learn From Yusin Holding's ROCE

In summary, it's unfortunate that Yusin Holding is generating lower returns from the same amount of capital. Despite the concerning underlying trends, the stock has actually gained 29% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you want to know some of the risks facing Yusin Holding we've found 3 warning signs (1 is a bit unpleasant!) that you should be aware of before investing here.

While Yusin Holding isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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