Returns At Yulon Motor (TWSE:2201) Are On The Way Up

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Yulon Motor (TWSE:2201) so let's look a bit deeper.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Yulon Motor:

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

0.065 = NT$7.7b ÷ (NT$385b - NT$267b) (Based on the trailing twelve months to September 2024).

Therefore, Yulon Motor has an ROCE of 6.5%. On its own that's a low return, but compared to the average of 3.6% generated by the Auto industry, it's much better.

See our latest analysis for Yulon Motor

Above you can see how the current ROCE for Yulon Motor compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Yulon Motor .

So How Is Yulon Motor's ROCE Trending?

Shareholders will be relieved that Yulon Motor has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 6.5% on its capital. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

On a separate but related note, it's important to know that Yulon Motor has a current liabilities to total assets ratio of 69%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

To bring it all together, Yulon Motor has done well to increase the returns it's generating from its capital employed. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 89% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.

Yulon Motor does have some risks, we noticed 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

While Yulon Motor 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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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.