How Well Is Yieh Phui Enterprise (TPE:2023) Allocating Its Capital?

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Basically the company is earning less on its investments and it is also reducing its total assets. Having said that, after a brief look, Yieh Phui Enterprise (TPE:2023) we aren't filled with optimism, but let's investigate further.

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. To calculate this metric for Yieh Phui Enterprise, this is the formula:

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

0.0064 = NT$365m ÷ (NT$82b - NT$25b) (Based on the trailing twelve months to September 2020).

Thus, Yieh Phui Enterprise has an ROCE of 0.6%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 3.6%.

See our latest analysis for Yieh Phui Enterprise

Historical performance is a great place to start when researching a stock so above you can see the gauge for Yieh Phui Enterprise's ROCE against it's prior returns. If you'd like to look at how Yieh Phui Enterprise has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Yieh Phui Enterprise's ROCE Trending?

There is reason to be cautious about Yieh Phui Enterprise, given the returns are trending downwards. To be more specific, the ROCE was 1.8% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Yieh Phui Enterprise becoming one if things continue as they have.

Our Take On Yieh Phui Enterprise's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Yet despite these concerning fundamentals, the stock has performed strongly with a 70% return 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 Yieh Phui Enterprise, we've discovered 2 warning signs that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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