Investors Could Be Concerned With Yuan Jen EnterprisesLtd's (TWSE:1725) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Yuan Jen EnterprisesLtd (TWSE:1725) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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. The formula for this calculation on Yuan Jen EnterprisesLtd is:

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

0.036 = NT$157m ÷ (NT$7.3b - NT$2.9b) (Based on the trailing twelve months to September 2023).

So, Yuan Jen EnterprisesLtd has an ROCE of 3.6%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 13%.

View our latest analysis for Yuan Jen EnterprisesLtd

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're interested in investigating Yuan Jen EnterprisesLtd's past further, check out this free graph covering Yuan Jen EnterprisesLtd's past earnings, revenue and cash flow.

So How Is Yuan Jen EnterprisesLtd's ROCE Trending?

On the surface, the trend of ROCE at Yuan Jen EnterprisesLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 3.6% from 6.8% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

Our Take On Yuan Jen EnterprisesLtd's ROCE

In summary, we're somewhat concerned by Yuan Jen EnterprisesLtd's diminishing returns on increasing amounts of capital. Yet despite these poor fundamentals, the stock has gained a huge 111% over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you'd like to know about the risks facing Yuan Jen EnterprisesLtd, we've discovered 1 warning sign that you should be aware of.

While Yuan Jen EnterprisesLtd 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. 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.