Should You Be Impressed By Yummy Town (Cayman) Holdings' (GTSM:2726) Returns on Capital?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. In light of that, when we looked at Yummy Town (Cayman) Holdings (GTSM:2726) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. Analysts use this formula to calculate it for Yummy Town (Cayman) Holdings:

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

0.021 = NT$21m ÷ (NT$1.7b - NT$742m) (Based on the trailing twelve months to September 2020).

So, Yummy Town (Cayman) Holdings has an ROCE of 2.1%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 5.6%.

See our latest analysis for Yummy Town (Cayman) Holdings

Above you can see how the current ROCE for Yummy Town (Cayman) Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Yummy Town (Cayman) Holdings here for free.

The Trend Of ROCE

On the surface, the trend of ROCE at Yummy Town (Cayman) Holdings doesn't inspire confidence. Around five years ago the returns on capital were 9.2%, but since then they've fallen to 2.1%. And considering revenue has dropped while employing more capital, we'd be cautious. 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.

On a separate but related note, it's important to know that Yummy Town (Cayman) Holdings has a current liabilities to total assets ratio of 43%, which we'd consider pretty high. 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.

What We Can Learn From Yummy Town (Cayman) Holdings' ROCE

In summary, we're somewhat concerned by Yummy Town (Cayman) Holdings' diminishing returns on increasing amounts of capital. Investors must expect better things on the horizon though because the stock has risen 29% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Yummy Town (Cayman) Holdings does come with some risks though, we found 6 warning signs in our investment analysis, and 2 of those shouldn't be ignored...

While Yummy Town (Cayman) Holdings 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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