What Yeong Guan Energy Technology Group's (TPE:1589) Returns On Capital Can Tell Us

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base 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. So after glancing at the trends within Yeong Guan Energy Technology Group (TPE:1589), we weren't too hopeful.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for Yeong Guan Energy Technology Group, this is the formula:

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

0.036 = NT$431m ÷ (NT$15b - NT$3.1b) (Based on the trailing twelve months to September 2020).

Therefore, Yeong Guan Energy Technology Group has an ROCE of 3.6%. Even though it's in line with the industry average of 3.6%, it's still a low return by itself.

View our latest analysis for Yeong Guan Energy Technology Group

In the above chart we have measured Yeong Guan Energy Technology Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Yeong Guan Energy Technology Group.

So How Is Yeong Guan Energy Technology Group's ROCE Trending?

There is reason to be cautious about Yeong Guan Energy Technology Group, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 11% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Yeong Guan Energy Technology Group becoming one if things continue as they have.

The Bottom Line On Yeong Guan Energy Technology Group's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Long term shareholders who've owned the stock over the last five years have experienced a 49% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with Yeong Guan Energy Technology Group (including 1 which can't be ignored) .

While Yeong Guan Energy Technology Group 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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