Yankey Engineering (GTSM:6691): Are Investors Overlooking Returns On Capital?

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. So when we looked at the ROCE trend of Yankey Engineering (GTSM:6691) we really liked what we saw.

Return On Capital Employed (ROCE): What is it?

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 Yankey Engineering, this is the formula:

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

0.35 = NT$719m ÷ (NT$4.8b - NT$2.8b) (Based on the trailing twelve months to June 2020).

Thus, Yankey Engineering has an ROCE of 35%. In absolute terms that's a great return and it's even better than the Construction industry average of 7.5%.

View our latest analysis for Yankey Engineering

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Yankey Engineering has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Yankey Engineering's ROCE Trending?

Yankey Engineering is displaying some positive trends. The data shows that returns on capital have increased substantially over the last four years to 35%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 119%. So we're very much inspired by what we're seeing at Yankey Engineering thanks to its ability to profitably reinvest capital.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 58% of the business, which is more than it was four 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 Yankey Engineering's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Yankey Engineering has. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 22% return over the last year. In light of that, we think it's worth looking further into this stock because if Yankey Engineering can keep these trends up, it could have a bright future ahead.

Yankey Engineering does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those can't be ignored...

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

If you decide to trade Yankey Engineering, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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